Mandatory Reliability Standards for the Bulk-Power System

Federal RegisterApr 4, 2007

Ask Donna

What actually matters in this document.

Text

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 40

[Docket No. RM06-16-000; Order No. 693]

Mandatory Reliability Standards for the Bulk-Power System

Issued March 16, 2007.

AGENCY:

Federal Energy Regulatory Commission, DOE.

ACTION:

Final rule.

SUMMARY:

Pursuant to section 215 of the Federal Power Act (FPA), the Commission approves 83 of 107 proposed Reliability Standards, six of the eight proposed regional differences, and the Glossary of Terms Used in Reliability Standards developed by the North American Electric Reliability Corporation (NERC), which the Commission has certified as the Electric Reliability Organization (ERO) responsible for developing and enforcing mandatory Reliability Standards. Those Reliability Standards meet the requirements of section 215 of the FPA and Part 39 of the Commission's regulations. However, although we believe it is in the public interest to make these Reliability Standards mandatory and enforceable, we also find that much work remains to be done. Specifically, we believe that many of these Reliability Standards require significant improvement to address, among other things, the recommendations of the Blackout Report. Therefore, pursuant to section 215(d)(5), we require the ERO to submit significant improvements to 56 of the 83 Reliability Standards that are being approved as mandatory and enforceable. The remaining 24 Reliability Standards will remain pending at the Commission until further information is provided.

The Final Rule adds a new part to the Commission's regulations, which states that this part applies to all users, owners and operators of the Bulk-Power System within the United States (other than Alaska or Hawaii) and requires that each Reliability Standard identify the subset of users, owners and operators to which that particular Reliability Standard applies. The new regulations also require that each Reliability Standard that is approved by the Commission will be maintained on the ERO's Internet Web site for public inspection.

EFFECTIVE DATE:

This rule will become effective June 4, 2007.

FOR FURTHER INFORMATION CONTACT:

Jonathan First (Legal Information), Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-8529.

Paul Silverman (Legal Information), Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-8683.

Robert Snow (Technical Information), Office of Energy Markets and Reliability, Division of Reliability, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-6716.

Kumar Agarwal (Technical Information), Office of Energy Markets and Reliability, Division of Policy Analysis and Rulemaking, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-8923.

SUPPLEMENTARY INFORMATION:

Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. Kelly; Marc Spitzer; Philip D. Moeller; and Jon Wellinghoff.

Table of Contents

Paragraph

I. Introduction

A. Background

1. EPAct 2005 and Order No. 672

2. NERC Petition for Approval of Reliability Standards

3. Staff Preliminary Assessment and Commission NOPR

4. Notice of Proposed Rulemaking

II. Discussion

A. Overview

1. The Commission's Underlying Approach to Review and Disposition of the Proposed Standards

2. Mandates of Section 215 of the FPA

3. Balancing the Need for Practicality with the Mandates of Section 215 and Order No. 672

B. Discussion of the Commission's New Regulations

1. Applicability

2. Mandatory Reliability Standards

3. Availability of Reliability Standards

C. Applicability Issues

1. Bulk-Power System v. Bulk Electric System

2. Applicability to Small Entities

3. Definition of User of the Bulk-Power System

110

4. Use of the NERC Functional Model

117

5. Regional Reliability Organizations

146

D. Mandatory Reliability Standards

161

1. Legal Standard for Approval of Reliability Standards

161

2. Commission Options When Acting on a Reliability Standard

169

3. Prioritizing Modifications to Reliability Standards

193

4. Trial Period

208

5. International Coordination

226

E. Common Issues Pertaining to Reliability Standards

234

1. Blackout Report Recommendation on Liability Limitations

234

2. Measures and Levels of Non-Compliance

238

3. Ambiguities and Potential Multiple Interpretations

264

4. Technical Adequacy

282

5. Fill-in-the-Blank Standards

287

F. Discussion of Each Individual Reliability Standard

304

1. BAL: Resource and Demand Balancing

305

2. CIP: Critical Infrastructure Protection

446

3. COM: Communications

473

4. EOP: Emergency Preparedness and Operations

542

5. FAC: Facilities Design, Connections, Maintenance, and Transfer Capabilities

678

6. INT: Interchange Scheduling and Coordination

796

7. IRO: Interconnection Reliability Operations and Coordination

889

8. MOD: Modeling, Data, and Analysis

1007

9. PER: Personnel Performance, Training and Qualifications

1325

10. PRC: Protection and Control

1419

11. TOP: Transmission Operations

1568

12. TPL: Transmission Planning

1684

13. VAR: Voltage and Reactive Control

1847

14. Glossary of Terms Used in Reliability Standards

1887

III. Information Collection Statement

1900

IV. Environmental Analysis

1909

V. Regulatory Flexibility Act

1910

VI. Document Availability

1947

VII. Effective Date and Congressional Notification

1950

Appendix A: Disposition of Reliability Standards, Glossary and Regional Differences

Appendix B: Commenters on the Notice of Proposed Rulemaking

Appendix C: Abbreviations in this Document

I. Introduction

1. Pursuant to section 215 of the Federal Power Act (FPA), the Commission approves 83 of 107 proposed Reliability Standards, six of the eight proposed regional differences, and the Glossary of Terms Used in Reliability Standards (glossary) developed by the North American Electric Reliability Corporation (NERC), which the Commission has certified as the Electric Reliability Organization (ERO) responsible for developing and enforcing mandatory Reliability Standards. Those Reliability Standards meet the requirements of section 215 of the FPA and Part 39 of the Commission's regulations. However, although we believe it is in the public interest to make these Reliability Standards mandatory and enforceable, we also find that much work remains to be done. Specifically, we believe that many of these Reliability Standards require significant improvement to address, among other things, the recommendations of the Blackout Report.

Therefore, pursuant to section 215(d)(5), we require the ERO to submit significant improvements to 56 of the 83 Reliability Standards that are being approved as mandatory and enforceable. The remaining 24 Reliability Standards will remain pending at the Commission until further information is provided.

2. The Final Rule adds a new part to the Commission's regulations, which states that this part applies to all users, owners and operators of the Bulk-Power System within the United States (other than Alaska or Hawaii) and requires that each Reliability Standard identify the subset of users, owners and operators to which that particular Reliability Standard applies. The new regulations also require that each Reliability Standard that is approved by the Commission will be maintained on the ERO's Internet Web site for public inspection.

U.S.-Canada Power System Outage Task Force, Final Report on the August 14 Blackout in the United States and Canada: Causes and Recommendations (April 2004) (Blackout Report). The Blackout Report is available on the Internet at

http://www.ferc.gov/cust-protect/moi/blackout.asp.

A. Background

1. EPAct 2005 and Order No. 672

3. On August 8, 2005, the Electricity Modernization Act of 2005, which is Title XII, Subtitle A, of the Energy Policy Act of 2005 (EPAct 2005), was enacted into law.

EPAct 2005 adds a new section 215 to the FPA, which requires a Commission-certified ERO to develop mandatory and enforceable Reliability Standards, which are subject to Commission review and approval. Once approved, the Reliability Standards may be enforced by the ERO, subject to Commission oversight or the Commission can independently enforce Reliability Standards.

Energy Policy Act of 2005, Pub. L. No 109-58, Title XII, Subtitle A, 119 Stat. 594, 941 (2005),

to be codified

at 16 U.S.C. 824o.

16 U.S.C. 824o(e)(3).

4. On February 3, 2006, the Commission issued Order No. 672, implementing section 215 of the FPA.

Pursuant to Order No. 672, the Commission certified one organization, NERC, as the ERO.

The ERO is required to develop Reliability Standards, which are subject to Commission review and approval.

The Reliability Standards will apply to users, owners and operators of the Bulk-Power System, as set forth in each Reliability Standard.

Rules Concerning Certification of the Electric Reliability Organization; Procedures for the Establishment, Approval and Enforcement of Electric Reliability Standards,

Order No. 672, 71 FR 8662 (February 17, 2006), FERC Stats. & Regs. ¶ 31,204 (2006),

order on reh'g,

Order No. 672-A, 71 FR 19814 (April 18, 2006), FERC Stats. & Regs. ¶ 31,212 (2006).

North American Electric Reliability Corp.,

116 FERC ¶ 61,062 (

ERO Certification Order

order on reh'g & compliance,

117 FERC ¶ 61,126 (

ERO Rehearing Order

) (2006),

order on compliance,

118 FERC ¶ 61,030 (2007) (

January 2007 Compliance Order

Section 215(a)(3) of the FPA defines the term Reliability Standard to mean “a requirement, approved by the Commission under this section, to provide for reliable operation of the Bulk-Power System. This term includes requirements for the operation of existing Bulk-Power System facilities, including cybersecurity protection, and the design of planned additions or modifications to such facilities to the extent necessary to provide for the reliable operation of the Bulk-Power System, but the term does not include any requirement to enlarge such facilities or to construct new transmission capacity or generation capacity.” 16 U.S.C. 824o(a)(3).

5. Section 215(d)(2) of the FPA and the Commission's regulations provide that the Commission may approve a proposed Reliability Standard if it determines that the proposal is just, reasonable, not unduly discriminatory or preferential, and in the public interest. The Commission specified in Order No. 672 certain general factors it would consider when assessing whether a particular Reliability Standard is just and reasonable.

According to this guidance, a Reliability Standard must provide for the Reliable Operation of Bulk-Power System facilities and may impose a requirement on any user, owner or operator of such facilities. It must be designed to achieve a specified

reliability goal and must contain a technically sound means to achieve this goal. The Reliability Standard should be clear and unambiguous regarding what is required and who is required to comply. The possible consequences for violating a Reliability Standard should be clear and understandable to those who must comply. There should be clear criteria for whether an entity is in compliance with a Reliability Standard. While a Reliability Standard does not necessarily need to reflect the optimal method for achieving its reliability goal, a Reliability Standard should achieve its reliability goal effectively and efficiently. A Reliability Standard must do more than simply reflect stakeholder agreement or consensus around the “lowest common denominator.” It is important that the Reliability Standards developed through any consensus process be sufficient to adequately protect Bulk-Power System reliability.

Order No. 672 at P 262, 321-37.

Id.

at P 329.

6. A Reliability Standard may take into account the size of the entity that must comply and the costs of implementation. A Reliability Standard should be a single standard that applies across the North American Bulk-Power System to the maximum extent this is achievable taking into account physical differences in grid characteristics and regional Reliability Standards that result in more stringent practices. It can also account for regional variations in the organizational and corporate structures of transmission owners and operators, variations in generation fuel type and ownership patterns, and regional variations in market design if these affect the proposed Reliability Standard. Finally, a Reliability Standard should have no undue negative effect on competition.

Id.

at P 332.

7. Order No. 672 directs the ERO to explain how the factors the Commission identified are satisfied and how the ERO balances any conflicting factors when seeking approval of a proposed Reliability Standard.

Id.

at P 337.

8. Pursuant to section 215(d)(2) of the FPA and § 39.5(c) of the Commission's regulations, the Commission will give due weight to the technical expertise of the ERO with respect to the content of a Reliability Standard or to a Regional Entity organized on an Interconnection-wide basis with respect to a proposed Reliability Standard or a proposed modification to a Reliability Standard to be applicable within that Interconnection. However, the Commission will not defer to the ERO or to such a Regional Entity with respect to the effect of a proposed Reliability Standard or proposed modification to a Reliability Standard on competition.

18 CFR 39.5(c)(1), (3).

9. The Commission's regulations require the ERO to file with the Commission each new or modified Reliability Standard that it proposes to be made effective under section 215 of the FPA. The filing must include a concise statement of the basis and purpose of the proposed Reliability Standard, a summary of the Reliability Standard development proceedings conducted by either the ERO or Regional Entity, together with a summary of the ERO's Reliability Standard review proceedings, and a demonstration that the proposed Reliability Standard is just, reasonable, not unduly discriminatory or preferential and in the public interest.

18 CFR 39.5(a).

10. Where a Reliability Standard requires significant improvement, but is otherwise enforceable, the Commission approves the Reliability Standard. In addition, as a distinct action under the statute, the Commission directs the ERO to modify such a Reliability Standard, pursuant to section 215(d)(5) of the FPA, to address the identified issues or concerns. This approach will allow the proposed Reliability Standard to be enforceable while the ERO develops any required modifications.

11. The Commission will remand to the ERO for further consideration a proposed new or modified Reliability Standard that the Commission disapproves in whole or in part.

When remanding a Reliability Standard to the ERO, the Commission may order a deadline by which the ERO must submit a proposed or modified Reliability Standard.

18 CFR 39.5(e).

2. NERC Petition for Approval of Reliability Standards

12. On April 4, 2006, as modified on August 28, 2006, NERC submitted to the Commission a petition seeking approval of the 107 proposed Reliability Standards that are the subject of this Final Rule.

According to NERC, the 107 proposed Reliability Standards collectively define overall acceptable performance with regard to operation, planning and design of the North American Bulk-Power System. Seven of these Reliability Standards specifically incorporate one or more “regional differences” (which can include an exemption from a Reliability Standard) for a particular region or subregion, resulting in eight regional differences. NERC stated that it simultaneously filed the proposed Reliability Standards with governmental authorities in Canada. The Commission addresses these proposed Reliability Standards in this rulemaking proceeding.

The filed proposed Reliability Standards are not attached to the Final Rule but are available on the Commission's eLibrary document retrieval system in Docket No. RM06-16-000 and are available on the ERO's Web site,

http://www.nerc.com/filez/nerc_filings_ferc.html.

Eight proposed Reliability Standards submitted in the August 29, 2006 filing that relate to cyber security, Reliability Standards CIP-002 through CIP-009, will be addressed in a separate rulemaking proceeding in Docket No. RM06-22-000.

13. On November 15, 2006, NERC filed 20 revised proposed Reliability Standards and three new proposed Reliability Standards for Commission approval. The 20 revised Reliability Standards primarily provided additional Measures and Levels of Non-Compliance, but did not add or revise any existing Requirements to these Reliability Standards. NERC requested that the 20 revised proposed Reliability Standards be included as part of the Final Rule issued by the Commission in this docket. The proposed new Reliability Standards, FAC-010-1, FAC-011-1, and FAC-014-1, will be addressed in a separate rulemaking proceeding in Docket No. RM07-3-000.

14. On December 1, 2006, NERC submitted in Docket No. RM06-16-000 an informational filing entitled “NERC's Reliability Standards Development Plan: 2007—2009” (Work Plan). NERC stated it was submitting the Work Plan to inform the Commission of NERC's program to improve the Reliability Standards that currently are the subject of the Commission's rulemaking proceeding.

3. Staff Preliminary Assessment and Commission NOPR

15. On May 11, 2006, Commission staff issued a “Staff Preliminary Assessment of the North American Electric Reliability Council's Proposed Mandatory Reliability Standards” (Staff Preliminary Assessment). The Staff Preliminary Assessment identifies staff's observations and concerns regarding NERC's then-current voluntary Reliability Standards. The Staff Preliminary Assessment describes issues common to a number of proposed Reliability Standards. It reviews and identifies issues regarding each individual Reliability Standard but did not make specific recommendations regarding the appropriate Commission action on a particular proposal.

16. Comments on the Staff Preliminary Assessment were due by June 26, 2006. Approximately 50 entities filed comments in response to

the Staff Preliminary Assessment. In addition, on July 6, 2006, the Commission held a technical conference to discuss NERC's proposed Reliability Standards, the Staff Preliminary Assessment, the comments and other related issues.

4. Notice of Proposed Rulemaking

17. The Commission issued the NOPR on October 20, 2006, and required that comments be filed within 60 days after publication in the

Federal Register

, or January 2, 2007.

The Commission granted the request of several commenters to extend the comment date to January 3, 2007. Several late-filed comments were filed. The Commission will accept these late-filed comments. A list of commenters appears in Appendix A.

Mandatory Reliability Standards for the Bulk Power System,

Notice of Proposed Rulemaking, 71 FR 64,770 (Nov. 3, 2006), FERC Stats. & Regs., Vol IV, Proposed Regulations, ¶ 32,608 (2006).

18. On November 27, 2006, the Commission issued a notice on the 20 revised Reliability Standards filed by NERC on November 15, 2006. In the notice, the Commission explained that, because of their close relationship with Reliability Standards dealt with in the October 20, 2006 NOPR, the Commission would address these 20 revised Reliability Standards in this proceeding.

The notice provided an opportunity to comment on the revised Reliability Standards, with a comment due date of January 3, 2007.

The modified 20 Reliability Standards are: CIP-001-1; COM-001-1; COM-002-2; EOP-002-2; EOP-003-1; EOP-004-1; EOP-006-1; INT-001-2; INT-003-2; IRO-001-1; IRO-002-1; IRO-003-2; IRO-005-2; PER-004-1; PRC-001-1; TOP-001-1; TOP-002-2; TOP-004-1; TOP-006-1; and TOP-008-1.

19. The Commission issued a notice on NERC's Work Plan on December 8, 2006. While the Commission sought public comment on NERC's filing because it was informative on the prioritization of modifying Reliability Standards raised in the NOPR, the notice emphasized that the Work Plan was filed for informational purposes and NERC stated that it is not requesting Commission action on the Work Plan.

20. On February 6, 2007, NERC submitted a request for leave to file supplemental information, and included a revised version of the NERC Statement of Compliance Registry Criteria (Revision 3). NERC noted that it had submitted with its NOPR comments an earlier version of the same document.

See

NERC comments, Attachment B.

II. Discussion

A. Overview

1. The Commission's Underlying Approach To Review and Disposition of the Proposed Standards

21. In this Final Rule, the Commission takes the important step of approving the first set of mandatory and enforceable Reliability Standards within the United States in accordance with the provisions of new section 215 of the FPA. The Commission's action herein marks the official departure from reliance on the electric utility industry's voluntary compliance with Reliability Standards adopted by NERC and the regional reliability councils and the transition to the mandatory, enforceable Reliability Standards under the Commission's ultimate oversight through the ERO and, eventually, the Regional Entities, as directed by Congress. As we discuss more fully below, in deciding whether to approve, approve and direct modifications, or remand each of the proposed Reliability Standards in this Final Rule, our overall approach has been one of carefully balancing the need for practicality during the time of transition with the imperatives of section 215 of the FPA and Order No. 672, and other considerations.

22. In addition, our action today is informed by the August 14, 2003 blackout which affected significant portions of the Midwest and Northeast United States and Ontario, Canada and impacted an estimated 50 million people and 61,800 megawatts of electric load. As noted in the NOPR, a joint United States-Canada task force found that the blackout was caused by several entities violating NERC's then-effective policies and Reliability Standards.

Those violations directly contributed to the loss of a significant amount of electric load. The joint task force identified both the need for legislation to make Reliability Standards mandatory and enforceable with penalties for noncompliance, as well as particular Reliability Standards that needed corrections to make them more effective in preventing blackouts. Indeed, the August 2003 blackout and the recommendations of the joint task force helped foster enactment of EPAct 2005 and new section 215 of the FPA.

NOPR at P 14.

2. Mandates of Section 215 of the FPA

23. The imperatives of section 215 of the FPA address not only the protection of the reliability of the Bulk-Power System but also the reliability roles of the Commission, the ERO, the Regional Entities, and the owners, users and operators of the Bulk-Power System.

First, section 215 specifies that the ERO is to develop and enforce a comprehensive set of Reliability Standards subject to Commission review. Section 215 explains that a Reliability Standard is a requirement approved by the Commission that is intended to provide for the Reliable Operation of the Bulk-Power System. Such requirement may pertain to the operation of existing Bulk-Power System facilities, including cybersecurity protection, or it may pertain to the design of planned additions or modifications to such facilities to the extent necessary to provide for reliable operation of the Bulk-Power System.

Generally speaking, the nation's Bulk-Power System has been described as consisting of “generating units, transmission lines and substations, and system controls.”

Maintaining Reliability in a Competitive U.S. Electricity Industry, Final Report of the Task Force on Electric System Reliability,

Secretary of Energy Advisory Board, U.S. Department of Energy (September 1998) at 2, 6-7. The transmission component of the Bulk-Power System is understood to provide for the movement of power in bulk to points of distribution for allocation to retail electricity customers. Essentially, transmission lines and other parts of the transmission system, including control facilities, serve to transmit electricity in bulk from generation sources to concentrated areas of retail customers, while the distribution system moves the electricity to where these retail customers consume it at a home or business.

16 U.S.C. 824o(a)(3).

24. Second, the reliability mandate of section 215 of the FPA addresses not only the comprehensive maintenance of the reliable operation of each of the elements of the Bulk-Power System, it also contemplates the prevention of incidents, acts and events that would interfere with the reliable operation of the Bulk-Power System. Further, section 215 seeks to prevent an instability, an uncontrolled separation or a cascading failure, whether resulting from either a sudden disturbance, including a cybersecurity incident, or an unanticipated failure of the system elements. In order to avoid these outcomes, the various elements and components of the Bulk-Power System are to be operated within equipment and electric system thermal, voltage and stability limits.

“The term ‘reliable operation’ means operating the elements of the Bulk-Power System within equipment and electric system thermal, voltage, and stability limits so that instability, uncontrolled separation, or cascading failures of such system will not occur as a result of a sudden disturbance, including a cybersecurity incident, or unanticipated failure of system elements.” 16 U.S.C. 824o(a)(4).

25. Third, section 215 of the FPA explains that the Bulk-Power System broadly encompasses both the facilities

and control systems necessary for operating an interconnected electric energy transmission network (or any portion thereof) as well as the electric energy from generation facilities needed to maintain transmission system reliability.

Further, section 215 explains that the interconnected transmission network within an Interconnection is a geographic area in which the operation of Bulk-Power System components is synchronized such that the failure of one such component, or more than one such component, may adversely affect the ability of the operators of other components within the system to maintain reliable operation of the facilities within their control.

A Cybersecurity Incident is explained to be a malicious act that disrupts or attempts to disrupt the operation of programmable electronic devices and communication networks including hardware, software or data that are essential to the reliable operation of the Bulk-Power System.

16 U.S.C. 824o(a)(1).

16 U.S.C. 824o(a)(5).

16 U.S.C. 824o(a)(8).

26. Next, as to the reliability roles of the Commission and others, section 215 of the FPA explains that the ERO must file each of its Reliability Standards and any modification thereto with the Commission.

The Commission will consider a number of factors before taking any action with respect thereto. We may approve the Reliability Standard or its modification only if we determine that it is just, reasonable, and not unduly discriminatory or preferential and in the public interest to do so. Also, in doing so, we are instructed to give due weight to the technical expertise of the ERO concerning the content of a proposed standard or a modification thereto. We must also give due weight to an Interconnection-wide Regional Entity with respect to a proposed Reliability Standard to be applicable within that Interconnection, except for matters concerning the effect on competition.

“The Electric Reliability Organization shall file each Reliability Standard or modification to a Reliability Standard that it proposes to be made effective under this section with the Commission.” 16 U.S.C. 824o(d)(1).

“The Commission may approve, by rule or order, a proposed Reliability Standard or modification to a Reliability Standard if it determines that the standard is just, reasonable, not unduly discriminatory or preferential, and in the public interest. The Commission shall give due weight to the technical expertise of the Electric Reliability Organization with respect to the content of a proposed standard or modification to a Reliability Standard and to the technical expertise of a regional entity organized on an Interconnection-wide basis with respect to a Reliability Standard to be applicable within that Interconnection, but shall not defer with respect to the effect of a standard on competition. A proposed standard or modification shall take effect upon approval by the Commission.” 16 U.S.C. 824o(d)(2).

27. Similarly, in considering whether to forward a proposed Reliability Standard to the Commission for approval, the ERO must rebuttably presume that a proposal from a Regional Entity organized on an Interconnection-wide basis for a Reliability Standard or modification to a Reliability Standard to be applicable on an Interconnection-wide basis is just, reasonable, and not unduly discriminatory or preferential, and in the public interest.

The Commission may also give deference to the advice of a Regional Advisory Body organized on an Interconnection-wide basis in regard to whether a proposed Reliability Standard is just, reasonable and not unduly discriminatory or preferential and in the public interest, as it may apply within the region.

16 U.S.C. 824o(d)(3).

16 U.S.C. 824o(j).

28. Finally, the Commission is further instructed to remand to the ERO for further consideration any standard or modification that it does not approve in whole or part.

We may also direct the ERO to submit a proposed Reliability Standard or modification that addresses a specific problem if we consider this course of action to be appropriate.

Further, if we find that a conflict exists between a Reliability Standard and any function, rule, order, tariff, rate schedule, or agreement accepted, approved, or ordered by the Commission applicable to a transmission organization,

and if we determine that the Reliability Standard needs to be changed as a result of such a conflict, we must order the ERO to develop and file with the Commission a modified Reliability Standard for this purpose.

16 U.S.C. 824o(d)(4).

16 U.S.C. 824o(d)(5).

Under section 215, a transmission organization is a RTO, ISO, independent transmission provider or other Transmission Organization finally approved by the Commission for the operation of transmission facilities. 16 U.S.C. 824o(a)(6).

16 U.S.C. 824o(d)(6).

3. Balancing the Need for Practicality With the Mandates of Section 215 and Order No. 672

29. In enacting section 215, Congress chose to expand the Commission's jurisdiction beyond our historical role as primarily an economic regulator of the public utility industry under Part II of the FPA. Many entities not previously touched by our economic regulatory oversight are within our reliability purview and these entities will have to familiarize themselves not only with the new reliability obligations under section 215 of the FPA and the Reliability Standards that we are approving in this Final Rule, but also any proposed Reliability Standards or improvements that may implicate them that are under development by the ERO and the Regional Entities.

We have taken these and other considerations into account and have tried to reach an appropriate balance among them.

Section 215(b) of the FPA provides that, for purposes of approving Reliability Standards and enforcing compliance with such standards, the Commission shall have jurisdiction over those entitles that had previously been excluded under section 201(f) of the FPA. Section 201(f) excludes the United States, a state or any political subdivision of a state, an electric cooperative that receives financing under the Rural Electrification Act of 1936, 7 U.S.C. 901

et seq.

, or that sells less than 4,000,000 megawatt hours of electricity per year, or any agency, authority, or instrumentality of any one or more of the foregoing, or any corporation which is wholly owned, directly or indirectly, by any one or more of the foregoing, or any officer, agent, or employee of any of the foregoing acting as such in the course of his official duty, unless such provision makes specific reference thereto. 16 U.S.C. 824(f).

30. First, we have decided, as proposed in our NOPR, to approve most of the Reliability Standards that the ERO submitted in this proceeding, even though concerns with respect to many of the Reliability Standards have been voiced. As most of these Reliability Standards are already being adhered to on a voluntary basis, we are concerned that to remand them and leave no standard in place in the interim would not help to ensure reliability when such standards could be improved over time. In these cases, however, the concerns highlighted below merit the serious attention of the ERO and we are directing the ERO to consider what needs to be done and how to do so, often by way of descriptive directives.

In Order No. 672, we decided, in response to some commenters' suggestions that a Reliability Standard should address the “what” and not the “how” of reliability and that the actual implementation should be left to entities such as control area operators and system planners, that in some limited situations, there may be good reason to do so but, for the most part, in other situations the “how” may be inextricably linked to the Reliability Standard and may need to be specified by the ERO to ensure the enforcement of the standard. Since leaving out implementation features could sacrifice necessary uniformity, create uncertainty for the entity that has to follow the standard, make enforcement difficult, or increase the complexity of the Commission's oversight and review process, we left it to the ERO to reach the appropriate balance between reliability principles and implementation features. Order No. 672 at P 260. We also decided that the Commission's authority to order the ERO to address a particular reliability topic is not in conflict with other provisions of Order No. 672 that assigned the responsibility for developing a proposed Reliability Standard to the ERO. Order No. 672 at P 416.

31. We emphasize that we are not, at this time, mandating a particular

outcome by way of these directives, but we do expect the ERO to respond with an equivalent alternative and adequate support that fully explains how the alternative produces a result that is as effective as or more effective that the Commission's example or directive.

32. We have sought to provide enough specificity to focus the efforts of the ERO and others adequately. We are also sensitive to the concern of the Canadian Federal Provincial Territorial Working Group (FPT) about the status of an existing standard that is already being followed on a voluntary basis. The FPT suggests, for example, that instead of remanding an existing Reliability Standard, the Commission should conditionally approve the standard pending its modification.

We believe the action we take today is similar in many respects to this approach.

FPT letter to Chairman Kelliher (submitted on July 10, 2006) (placed in the record of this proceeding).

33. We have also adopted a number of other measures to mitigate many of the difficulties associated with the electric utility industry's preparation for and transition to mandatory Reliability Standards. For instance, we are directing the ERO and Regional Entities to focus their enforcement resources during an initial period on the most serious Reliability Standard violations. Moreover, because commenters have raised valid concerns as discussed below, our Final Rule relies on the existing NERC definition of bulk electric system and its compliance registration process to provide as much certainty as possible regarding the applicability and responsibility of specific entities under the approved standards. This approach should also assuage the concerns of many smaller entities.

B. Discussion of the Commission's New Regulations

1. Applicability

34. In the NOPR, the Commission proposed to add § 40.1(a) to the regulations. The Commission proposed that § 40.1(a) would provide that this Part applies to all users, owners and operators of the Bulk-Power System within the United States (other than Alaska and Hawaii) including, but not limited to, the entities described in section 201(f) of the FPA. This statement is consistent with section 215(b) of the FPA and § 39.2 of the Commission's regulations.

35. The Commission further proposed to add § 40.1(b), which would require each Reliability Standard made effective under this Part to identify the subset of users, owners and operators to whom that particular Reliability Standard applies.

a. Comments

36. NERC agrees with the Commission's proposal to add the text of § 40.1(b) to its regulations to require that each Reliability Standard identify the subset of users, owners and operators to which that particular Reliability Standard applies and believes this requirement is currently established in NERC's Rules of Procedure.

37. TANC supports proposed § 40.1. It states that requiring each Reliability Standard to identify the subset of users, owners and operators to whom it applies, thereby limiting the scope of the broad phrase “users, owners and operators,” is a critical step to removing ambiguities from the Reliability Standards. According to TANC, the proposed text of § 40.1 would eliminate ambiguities with regard to the entity responsible for complying with each Reliability Standard. In this way, Regional Entities and other interested parties will be allowed to weigh in during the Reliability Standards development process on the breadth of each standard and may urge NERC to accept any necessary regional variations that are necessary to maintain adequate reliability within the region.

38. APPA believes that the Commission's proposal to add § 40.1 and 40.2 to its regulations is generally appropriate and acceptable, but the regulatory language should be amended to make clear the exact universe of users, owners and operators of the Bulk-Power System to which the mandatory Reliability Standards apply. It recommends that the regulations provide that determinations as to applicability of standards to particular entities shall be resolved by reference to the NERC compliance registry.

b. Commission Determination

39. The Commission adopts the NOPR's proposal to add § 40.1 to the Commission's regulations. The Commission disagrees with APPA's suggestion to define here the exact universe of users, owners and operators of the Bulk-Power System to which the mandatory Reliability Standards apply. Rather, consistent with NERC's existing approach, we believe that it is appropriate that each Reliability Standard clearly identify the subset of users, owners and operators to which it applies and the Commission determines applicability on that basis. As we discuss later, we approve NERC's current compliance registry to provide certainty and stability in identifying which entities must comply with particular Reliability Standards.

2. Mandatory Reliability Standards

40. The Commission proposed to add § 40.2(a) to the Commission's regulations. The proposed regulation text would require that each applicable user, owner and operator of the Bulk-Power System comply with Commission-approved Reliability Standards developed by the ERO, and would provide that the Commission-approved Reliability Standards can be obtained from the Commission's Public Reference Room at 888 First Street, NE., Room 2A, Washington, DC 20426.

41. The Commission further proposed to add § 40.2(b) to its regulations, providing that a modification to a Reliability Standard proposed to become effective pursuant to § 39.5 shall not be effective until approved by the Commission.

a. Comments

42. NERC concurs with the Commission's proposal to require NERC to provide to the Commission a copy of all approved Reliability Standards for posting in its Public Reference Room. NERC agrees with the Commission that neither the text nor the title of an approved Reliability Standard should be codified in the Commission's regulations.

b. Commission Determination

43. For the reasons discussed in the NOPR, the Commission generally adopts the NOPR's proposal to add § 40.2 to the Commission's regulations.

However, after consideration, the Commission has determined that it is not necessary to have the approved Reliability Standards on file in the Commission's public reference room and on the NERC Web site. Therefore, we will require that all Commission-approved Reliability Standards be available on the ERO's Web site, with an effective date, and revise § 40.2(b) to remove the following language: “Which can be obtained from the Commission's Public Reference Room at 888 First Street, NE., Room 2A, Washington, DC, 20426.” Further, to be consistent with Part 39 of our regulations, we remove the reference to NERC and replace it with “Electric Reliability Organization.”

NOPR at P 37.

3. Availability of Reliability Standards

44. The Commission proposed to add § 40.3 to the regulation text, which requires that the ERO maintain in electronic format that is accessible from the Internet the complete set of effective

Reliability Standards that have been developed by the ERO and approved by the Commission. The Commission stated that it believes that ready access to an electronic version of the effective Reliability Standards will enhance transparency and help avoid confusion as to which Reliability Standards are mandatory and enforceable. We noted that NERC currently maintains the existing, voluntary Reliability Standards on the NERC Web site.

45. While the NOPR discusses each Reliability Standard and identifies the Commission's proposed disposition for each Reliability Standard, we did not propose to codify either the text or the title of an approved Reliability Standard in the Commission's regulations. Rather, we proposed that each user, owner or operator of the Bulk-Power System must comply with applicable Commission-approved Reliability Standards that are available in the Commission's Public Reference Room and on the Internet at the ERO's Web site. We stated that this approach is consistent with the statutory options of approving a proposed Reliability Standard or modification to a Reliability Standard “by rule or order.”

See

16 U.S.C. 824o(d)(2).

a. Comments

46. NERC states that it can successfully implement the Commission's proposal to require NERC to maintain in electronic format that is accessible from the Internet the complete set of Reliability Standards that have been developed by the ERO and approved by the Commission. NERC currently maintains a public Web site displaying the existing, voluntary Reliability Standards for access by users, owners and operators of the Bulk-Power System. Once the proposed Reliability Standards are approved by the Commission, NERC will modify its Web site to distinguish which Reliability Standards have been approved by the Commission for enforcement in the United States.

47. EEI states that the approval of Reliability Standards should be through a rulemaking rather than an order, except in very rare circumstances, because of the open nature of the rulemaking process. Where the Commission decides to proceed by order, EEI states that the Commission should give notice and an opportunity to comment on any proposed Reliability Standards.

b. Commission Determination

48. For the reasons discussed in the NOPR, the Commission adopts the NOPR's proposal to add § 40.3 to the Commission's regulations; however the Commission has further clarified the proposed regulatory text.

We clarify that the ERO must post on its Web site the currently effective Reliability Standards as approved and enforceable by the Commission. Further, we require the effective date of the Reliability Standards must be included in the posting.

NOPR at P 39-41.

49. In response to EEI, the Commission anticipates that it will address most, if not all, new Reliability Standards proposed by NERC through a rulemaking process. However, we retain the flexibility to address matters by order where appropriate, consistent with the statute and our regulations.

In Order No. 672, the Commission stated that it would provide notice and opportunity for public comment except in extraordinary circumstances and, on rehearing, clarified that any decision by the Commission not to provide notice and comment when reviewing a proposed Reliability Standard will be made in accordance with the criteria established in section 553 of the Administrative Procedure Act.

See

16 U.S.C. 824o(d)(2) (“the Commission may approve, by rule or order, a proposed Reliability Standard or modification * * *”); 18 CFR 39.5(c).

See

Order No. 672 at P 308; Order No 672-A at P 26.

C. Applicability Issues

1. Bulk-Power System v. Bulk Electric System

50. The NOPR observed that, for purposes of section 215, “Bulk-Power System” means:

(A) facilities and control systems necessary for operating an interconnected electric energy transmission network (or any portion thereof) and (B) electric energy from generating facilities needed to maintain transmission system reliability. The term does not include facilities used in the local distribution of electric energy.

51. The NERC glossary, in contrast, states that Reliability Standards apply to the “bulk electric system,” which is defined by its regions in terms of a voltage threshold and configuration, as follows:

As defined by the Regional Reliability Organization, the electrical generation resources, transmission lines, interconnections with neighboring systems, and associated equipment, generally operated at voltages of 100 kV or higher. Radial transmission facilities serving only load with one transmission source are generally not included in this definition.

NERC Glossary at 2. All citations to the Glossary in this Final Rule refer to the November 1, 2006 version filed on November 15, 2006.

52. In the NOPR, the Commission proposed that, for the initial approval of proposed Reliability Standards, the continued use of NERC's definition of bulk electric system as set forth in the NERC glossary is appropriate.

However, the Commission interpreted the term “bulk electric system” to apply to: (1) All of the ≥ 100 kV transmission systems and any underlying transmission system (< 100 kV) that could limit or supplement the operation of the higher voltage transmission systems and (2) transmission to all significant local distribution systems (but not the distribution system itself), transmission to load centers and transmission connecting generation that supplies electric energy to the system. The Commission proposed that, if a question arose concerning which underlying transmission system limits or supplements the operation of the higher voltage transmission system, the ERO would determine the matter on a case-by-case basis.

NOPR at P 66-70. The Commission explained in the NOPR that regional definitions had not been submitted and it would not determine the appropriateness of any regional definition in the current rulemaking proceeding.

Id.

at n. 56.

53. The Commission solicited comment on its interpretation and whether the Regional Entities should, in the future, play a role in either defining the facilities that are subject to a Reliability Standard or be allowed to determine an exception on a case-by-case basis.

54. Further, the NOPR explained that continued reliance on multiple regional interpretations of the NERC definition of bulk electric system, which omits significant portions of the transmission system component of the Bulk-Power System that serve critical load centers, is not appropriate. Thus, the NOPR proposed that, in the long run, NERC revise the current definition of bulk electric system to ensure that all facilities, control systems and electric energy from generation resources that impact system reliability are included within the scope of applicability of Reliability Standards, and that NERC's revision is consistent with the statutory term Bulk-Power System.

a. Comments

55. Most commenters, including NERC, NARUC, APPA, National Grid, EEI and Ontario IESO, believe that the Commission should only impose Reliability Standards on those entities that fall under NERC's definition of bulk electric system as it existed under the voluntary regime. They state that, by extending the definition of bulk electric system, the Commission goes beyond

what is necessary to protect Bulk-Power System reliability, creates uncertainty and will divert resources from monitoring compliance of those entities that could have a material impact on Bulk-Power System reliability.

56. Entergy, however, agrees with the Commission that NERC's definition of bulk electric system is not adequate and agrees with the Commission's proposed interpretation. ISO-NE does not oppose the NOPR's approach on how to interpret the term “Bulk-Power System,” but it states that this broader scope justifies a delay in the date civil penalties take effect, to January 1, 2008, to provide the industry sufficient time to review the Commission's Final Rule and to adjust to the expanded reach of the Reliability Standards.

57. NERC, APPA and NRECA maintain that there was no intentional distinction made by Congress between “Bulk-Power System” (as defined in section 215) and the “bulk electric system” (as defined by the NERC glossary). NERC asserts that recent discussions with stakeholders confirm NERC's belief that there was no distinction intended. Moreover, NERC is not aware of any documentation that suggests a distinction was intended. NRECA argues that legislative intent and prior usage do not support the Commission's approach to defining the Bulk-Power System. NRECA concedes that no conference committee report accompanied EPAct 2005, but it notes that the Congressional Research Service specifies in its manual on statutory interpretation that “[W]here Congress borrows terms of art in which are accumulated the legal tradition and meaning of centuries of practice, it presumably knows and adopts the cluster of ideas that were attached to each borrowed word in the body of learning from which it was taken.”

NRECA, citing

Morissette

United States,

342 U.S. 246, 263 (1952).

58. TAPS states that the Commission cannot lawfully “interpret” the bulk electric system definition contrary to its terms. According to TAPS, the Commission cannot include facilities below 100 kV “that could limit or supplement the operation of the higher voltage transmission systems,” in the bulk electric system, even if they are “necessary for operating” the bulk system, because these facilities are not included in NERC's definition of bulk electric system.

59. NERC states that the Commission's proposal that NERC's “bulk electric system” should apply to all of the equal to or greater than 100 kV transmission systems and any underlying transmission system (less than 100 kV) that could limit or supplement the operation of the higher voltage transmission systems is a significant expansion over what the industry has historically regarded as the bulk electric system, both in terms of the facilities covered and the entities involved. While NERC agrees with the Commission that Congress intended to give the Commission broad jurisdiction over the reliability of the Bulk-Power System, it does not believe this is the right time for the Commission to define the full extent of its jurisdiction or that the approach proposed in the NOPR is the right way to do so. In addition, NERC does not believe it is legally necessary for the Commission to extend its jurisdiction to the limits in a single step.

60. NERC states that the Commission should make clear in this Final Rule that its jurisdiction is at least as broad as the historic NERC definition of “bulk electric system” and that the Commission will use that definition for the near term. NERC asserts that the Commission should also make clear that it is not deciding in this docket the full scope of its jurisdiction and is reserving its right to consider a broader definition. Instead, NERC states that the Commission should focus on approving an initial set of Reliability Standards for the core set of users, owners and operators that have the most significant impact on the reliability of the Bulk-Power System. NERC maintains that this core set has been defined through its use of the terms “bulk electric system” and “responsible entities” provided in the NERC Glossary, the “Applicability” section of each Reliability Standard and substantive requirements of the standards themselves, and NERC's registration of specific entities that are responsible for compliance with the Reliability Standards.

61. NRECA argues that the definition of “Bulk-Power System” contained in section 215(a)(1) reflects Congressional intent to codify the established materiality component because Congress limited the definition of Bulk-Power System to facilities and control systems necessary for operating an interconnected electric energy transmission network and electric energy from generation facilities needed to maintain transmission system reliability. NRECA argues that these limiting terms mean that not all transmission facilities are included. In NRECA's view, the definition of the Bulk-Power System within the meaning of section 215 cannot extend to radial facilities to “significant local distribution systems,” “load centers,” or local transmission facilities unless otherwise “necessary for” (

i.e.

, material to) the reliable operation of the interconnected grid. Further, NRECA states that the definition of “Reliable Operation” in section 215(a) focuses on the reliable operation of the Bulk-Power System and not the protection of local load per se.

62. Certain commenters assert that expanding the scope of the Commission's jurisdiction and the scope of the Reliability Standards in this proceeding would be an unanticipated expansion of the reach of the existing Reliability Standards implemented with insufficient due process and may cause jurisdictional concerns.

They state that the Reliability Standards under consideration were developed and approved through NERC's Reliability Standards development process with the intention that they would apply based on the industry's historical conception of the bulk electric system and that the outcome might have been different using the Commission's proposed definition. NERC therefore argues that it would be inappropriate to assume that the requirements of the existing Reliability Standards would be relevant to an expanded set of entities or an expanded scope of facilities under a broader definition of the Bulk-Power System. NERC also asserts that there is no reasonable justification for subjecting “thousands of small entities” to the costs of compliance with the Reliability Standards when there is no reasonable justification to do so in terms of incremental benefit to the reliability of the Bulk-Power System.

See,

e.g.

, NERC, TAPS and NRECA.

63. NRECA, APPA and others argue that the Commission's interpretation would undermine, rather than promote, reliability. According to these commenters, the Commission's interpretation would require new definitions, such as one for “load center,” and otherwise creates confusion. For example, Small Entities Forum states that it is concerned with the inclusion of “transmission connecting generation that supplies electric energy to the system” because that could include any transmission connected to any generation of any size.

64. APPA objects to the Commission's statement that “[t]he transmission system component of the Bulk-Power System is understood to provide for the movement of power in bulk to points of distribution for allocation to retail electricity customers.” APPA states that it does not believe there is an industry “understanding” that the bulk electric system or the Bulk-Power System

necessarily encompass all transmission facilities that connect major generation stations to distribution systems or that there is a bright line between transmission and distribution facilities. APPA interprets these terms as describing the backbone facilities that integrate regional transmission networks.

65. NERC's approach to moving forward with the enforcement of mandatory Reliability Standards is to register the specific entities that NERC will hold accountable for compliance with the Reliability Standards. The registration will identify all entities that are material to the reliability of the Bulk-Power System. NERC maintains its most important role is to mitigate noncompliant behavior regardless of an entity's registration. Further, NERC asserts that all that it and the Commission give up by using the registration approach is, at most, “one penalty, one time” for an entity. That is, if there is an entity that is not registered and NERC later discovers that the entity can have a material impact on the reliability of the Bulk-Power System, NERC has the ability to add the entity, and possibly other entities of a similar class, to the registration list and to direct corrective action by that entity on a going forward basis.

Thereafter, of course, the entity would be subject to sanctions. APPA, TANC, AMP-Ohio and NPCC support this approach. While SoCal Edison believes that there can be no single definition of Bulk-Power System, it states that NERC's registry is a good starting point to developing general criteria for what facilities should be subject to the Reliability Standards.

See

Rules of Procedure, § 500.

66. AMP-Ohio supports NERC's proposal to include any additional entities or facilities that it believes could have a detrimental effect on the reliability of the bulk electric system on a case-by-case basis over time. Further, Ontario IESO suggests that if the Commission believes that NERC's definition of bulk electric system excludes facilities that should be subject to Reliability Standards for reasons other than preventing cascading outages, the Commission could submit a detailed request through the ERO Reliability Standards development process.

67. NERC and EEI believe that, in the long run, NERC should be directed to develop, through its Reliability Standards development process, a single process to identify the specific elements of the Bulk-Power System that must comply with Reliability Standards under section 215. According to NERC, the Commission, the states, and all other stakeholders would benefit tremendously from a deliberate dialogue on these matters. NERC asks that the Commission not directly define the outer limits of its jurisdiction under section 215, but requests that the Commission direct NERC to undertake certain activities to reconcile the definitions of bulk electric system and Bulk-Power System and report the results back to the Commission.

68. Similarly, TAPS, APPA, Duke and MidAmerican state that, if there is a problem with NERC's current definition of the bulk electric system, the Commission should require NERC to revisit it using the ANSI process to give “due weight” to NERC's technical expertise. AMP-Ohio, TANC, Georgia Operators and Entergy state that Regional Entities should play a primary role in defining the facilities that are subject to a Reliability Standard because the Regional Entities will have more detailed system knowledge in their regions than NERC or the Commission.

69. The Connecticut Attorney General, the Connecticut DPUC and the New England Conference of Public Utilities Commissioners maintain that NERC's definition of the “bulk electric system” exceeds the Commission's jurisdiction by including generation that is not needed to maintain transmission system reliability and therefore intrudes into state jurisdiction over generation resource adequacy matters and is unlawful. According to Connecticut DPUC, section 215(a)(1) of the FPA excludes from federal regulation (1) facilities that are used in local distribution, (2) facilities and control systems that are not necessary for operating an interconnected electric energy transmission network or part of a network and (3) electric energy from generating facilities not needed to maintain transmission system reliability. Connecticut DPUC maintains that, in contrast, NERC's definition replaces the FPA definition with criteria based on voltage thresholds for transmission facilities and electric energy from generating facilities. According to Connecticut DPUC, NERC's definition does not comply with section 215(a)(1) because it includes facilities and equipment that are neither “necessary” for operation of the transmission network nor “needed” to maintain transmission system reliability. The Connecticut Attorney General and Connecticut DPUC, therefore, urge the Commission to reject this definition.

70. Further, in Connecticut DPUC's view, because the Commission cannot adopt NERC's definition of bulk electric system, it cannot expand the boundaries of its jurisdiction farther than the bulk electric system. It maintains that Congress did not give the Commission jurisdiction to mandate and enforce all Reliability Standards, especially those related to the long-term adequacy of generation resources; therefore, the Commission may not delegate to an ERO authority that it does not have. APPA also states that the Commission expanded the definition of the bulk electric system so that it may affect facilities subject to state reliability jurisdiction, such as low-voltage transmission systems that affect only the local areas served by those facilities, which do not cause cascading outages, without explaining why it is necessary to federalize reliability responsibility for outages on these facilities.

71. NARUC and New York Commission maintain that the Commission's proposed interpretation of what facilities constitute the Bulk-Power System is inconsistent with section 215 of the FPA. They state that the ability of a facility to “limit or supplement” the transmission system does not automatically mean that a facility is necessary for operating an interconnected transmission system, as required by the FPA, or for maintaining system reliability. According to NARUC, Congress only authorized the Commission to approve Reliability Standards necessary for operating an interconnected electric energy transmission network. Although the NOPR interpretation includes these underlying facilities, it also covers others that are not required to operate an interconnected transmission network.

72. Moreover, NARUC and New York Commission state that the NOPR proposal to define Bulk-Power System as all facilities operating at or above 100 kV exceeds the Commission's jurisdiction. According to NARUC and New York Commission, there is generally a layer of “area” transmission facilities below the “Bulk-Power System” and above distribution facilities that move energy within a service territory and toward load centers. However, NARUC and New York Commission claim that only a small subset of these underlying facilities assists in maintaining the reliability of the Bulk-Power System.

73. Several commenters, including New York Commission, NYSRC, Massachusetts DTE, NPCC, TANC and Ontario IESO, support a functional, impact-based approach to applying Reliability Standards. According to NPCC, neither NERC nor section 215 of the FPA provide a rigorous approach to

determining which elements play a role in maintaining reliability of the bulk electric system. These commenters generally state that an impact-based approach would define those elements necessary for Reliable Operation and ensure that compliance and enforcement efforts concentrate on those facilities that materially affect the Reliable Operation of the interconnected Bulk-Power System, while at the same time balancing the costs imposed by mandatory Reliability Standards with the reliability improvement realized on the interconnected Bulk-Power System.

74. Ontario IESO maintains that reliability impact is a process of assessing facilities to determine if, due to recognized contingencies and other test criteria, they represent a significant adverse impact beyond a local area. This assessment will be the basis of a consistent test methodology the ERO must develop to define the facilities included within the overall Bulk-Power System to which a Reliability Standard would apply. Ontario IESO states that the Commission should direct the ERO to take the lead in developing the impact assessment procedure to provide a consistent and uniform methodology that can be applied by any Regional Entity. Ontario IESO does not support the Commission's proposal to limit case-by-case determinations to underlying transmission systems operating at less than 100 kV.

b. Commission Determination

75. The Commission agrees with commenters that, at least initially, expanding the scope of facilities subject to the Reliability Standards could create uncertainty and might divert resources as the ERO and Regional Entities implement the newly created enforcement and compliance regime. Further, we agree with commenters that unilaterally modifying the definition of the term bulk electric system is not an effective means to achieve our goal. For these reasons, the Commission is not adopting the proposed interpretation contained in the NOPR. Rather, for at least an initial period, the Commission will rely on the NERC definition of bulk electric system

and NERC's registration process to provide as much certainty as possible regarding the applicability to and the responsibility of specific entities to comply with the Reliability Standards in the start-up phase of a mandatory Reliability Standard regime.

“As defined by the Regional Reliability Organization, the electrical generation resources, transmission lines, interconnections with neighboring systems, and associated equipment, generally operated at voltages of 100 kV or higher. Radial transmission facilities serving only load with one transmission source are generally not included in this definition.”

See

Section II.C.2., Applicability to Small Entities, infra.

76. However, we disagree with NERC, APPA and NRECA that there is no intentional distinction between Bulk-Power System and bulk electric system. NRECA states that “[W]here Congress borrows terms of art in which are accumulated the legal tradition and meaning of centuries of practice, it presumably knows and adopts the cluster of ideas that were attached to each borrowed word in the body of learning from which it was taken.”

In this instance, however, Congress did not borrow the term of art—bulk electric system—but instead chose to create a new term, Bulk-Power System, with a definition that is distinct from the term of art used by industry. In particular, the statutory term does not establish a voltage threshold limit of applicability or configuration as does the NERC definition of bulk electric system. Instead, section 215 of the FPA broadly defines the Bulk-Power System as “facilities and control systems necessary for operating an interconnected electric energy transmission network (or any portion thereof) [and] electric energy from generating facilities needed to maintain transmission system reliability.” Therefore, the Commission confirms its statements in the NOPR that the Bulk-Power System reaches farther than those facilities that are included in NERC's definition of the bulk electric system.

Citing

Morissette

United States,

342 U.S. 246, 263 (1952).

NOPR at P 66. For these same reasons, the Commission rejects the position of those commenters that suggest the statutory definition of Bulk-Power System is more limited than the NERC definition of bulk electric system.

77. Although we are accepting the NERC definition of bulk electric system and NERC's registration process for now, the Commission remains concerned about the need to address the potential for gaps in coverage of facilities. For example, some current regional definitions of bulk electric system exclude facilities below 230 kV and transmission lines that serve major load centers such as Washington, DC and New York City.

The Commission intends to address this matter in a future proceeding. As a first step in enabling the Commission to understand the reach of the Reliability Standards, we direct the ERO, within 90 days of this Final Rule, to provide the Commission with an informational filing that includes a complete set of regional definitions of bulk electric system and any regional documents that identify critical facilities to which the Reliability Standards apply (

i.e.

, facilities below a 100 kV threshold that have been identified by the regions as critical to system reliability).

See id.

at P 64-65 & n.53-54.

78. The Commission believes that the above approach satisfies concerns raised by NARUC and New York Commission that the proposal to interpret Bulk-Power System exceeds the Commission's jurisdiction. When the Commission addresses this matter in a future proceeding, it will consider NARUC's and New York Commission's comments regarding the “layer of ‘area' transmission.”

79. We disagree with commenters claiming that the ERO's definition of bulk electric system is

broader

than the statutory definition of Bulk-Power System. Connecticut Attorney General, Connecticut DPUC and others argue that the ERO's definition of bulk electric system exceeds the Commission's jurisdiction by including generation that is not needed to maintain transmission system reliability and, therefore, intrudes into state jurisdiction over generation resource adequacy. First, none of the Reliability Standards submitted by the ERO set requirements for resource adequacy. Moreover, commenters have not adequately supported their claim that the “threshold” in the NERC definition of bulk electric system that includes facilities “

generally

operated at 100 kV or higher” is broader than the statutory phrase “electric energy from generation facilities needed to maintain transmission system reliability.” As stated explicitly in the NERC definition, this is a “general” threshold and allows leeway to address specific circumstances. On its face, the NERC definition is not overbroad; as applied, it must be interpreted and applied consistent with the statutory language in section 215. Finally, as stated above, we believe that the ERO definition of bulk electric system is narrower than the statutory definition of Bulk-Power System.

2. Applicability to Small Entities

80. The NOPR discussed NERC's plan to, in the future, identify in a particular Reliability Standard limitations on applicability based on electric facility characteristics.

The Commission agreed that it is important to examine the impact a particular entity may have on the Bulk-Power System in determining the applicability of a specific Reliability Standard. However,

the Commission stated that a “blanket waiver” approach that would exempt entities below a threshold level from compliance with all Reliability Standards would not be appropriate because there may be instances where a small entity's compliance is critical to reliability. The Commission also proposed to direct NERC to develop procedures that permit a joint action agency or similar organization to accept compliance responsibility on behalf of their members.

Id.

P 49-53.

81. In addition, the Commission solicited comment on whether, despite the existence of a threshold in a particular standard (

e.g.

, generators with a nameplate rating of 20 MW or over), the ERO or a Regional Entity should be permitted to include an otherwise exempt facility,

e.g.

, a 15 MW generator, on a facility-by-facility basis, if it determines that the facility is needed for Bulk-Power System reliability and, if so, what, if any, process the ERO or Regional Entity should provide when making such a determination.

a. Identifying Applicable Small Entities

i. Comments

82. While certain commenters, including EEI, FirstEnergy, SERC, Xcel and Entergy, agree with the Commission that a blanket waiver to exempt small entities from compliance is not appropriate because there may be instances where a small entity's compliance is critical to reliability, APPA, ELCON, Process Electricity Committee, MEAG and South Carolina E&G advocate a blanket waiver.

83. APPA notes that none of the entities that contributed to the August 14, 2003 blackout were “small entities” within the meaning of the Regulatory Flexibility Act. APPA and MEAG believe that the Commission's refusal to provide for a blanket waiver to small entities is counterproductive to maintaining reliability, as it will distract compliance staff at NERC and the Regional Entities from identifying and monitoring those with a material impact on reliability, and gives insufficient deference to NERC as the ERO. APPA recommends that the methods and procedures used to identify critical facilities that impact the bulk electric system, regardless of size, should be the subject of a specific set of NERC Reliability Standards. Objective, transparent study criteria and assumptions and due process for affected entities are essential to implement such standards properly. Regional Entities should take advantage of industry expertise in developing and applying the methodology for determining critical facilities.

84. According to MEAG, because the Commission has already determined that it is not bound by the NERC compliance registry,

the NOPR's approach leaves small systems, which do not appear on the compliance registry, confused about whether the Reliability Standards apply to them. MEAG asks the Commission to either: (1) Grant a temporary, size-based exemption to those small entities that NERC omits from its preliminary compliance registry; or (2) direct NERC to develop and file with the Commission an appropriate size-based exemption for small entities.

See

ERO Rehearing Order at P 108.

85. Several commenters suggest thresholds for applying Reliability Standards. MEAG states that an appropriate threshold level for an exemption, on either an interim or more permanent basis, should at least provide that a LSE or distribution provider should generally be omitted from the compliance registry if it meets the following criteria: (1) Its peak load is less than 25 MW and it is not directly connected to the Bulk-Power System; (2) it is not designated as the responsible entity for facilities that are part of a required underfrequency load shedding (UFLS) program designed, installed, and operated for the protection of the Bulk-Power System; or (3) it is not designated as the responsible entity for facilities that are part of a required undervoltage load shedding (UVLS) program designed, installed, and operated for the protection of the Bulk-Power System. STI Capital states that there should be a rebuttable presumption that any generation facility below 50 MW does not pose a threat to reliability. Moreover, more data intensive standards are beyond the ability of small generators.

86. SERC states that exemptions should be granted through the Reliability Standards development process. The ERO and the Regional Entities can provide guidance in that process, and stakeholders have an opportunity to comment on that guidance.

87. A number of commenters, including APPA, NRECA, TANC and TAPS, ask the Commission to adopt NERC's registry guidelines and make clear that issues of applicability will be determined with reference to the NERC compliance registry.

TAPS asks the Commission to either approve NERC's registry criteria, or send them back to NERC for further consideration, with mandatory application of Reliability Standards deferred until NERC submits waiver criteria the Commission finds acceptable. According to TAPS, these criteria do not constitute a blanket waiver because they allow NERC and its Regional Entities to go below the general threshold requirements where they determine it is necessary.

NERC has developed a Statement of Compliance Registry Criteria that provides guidance on how NERC will identify organizations that may be candidates for registration.

See

NERC comments, Attachment B; NERC's February 6, 2007 supplemental filing.

88. California Cogeneration states that, while focusing on entities that have a material impact on the Bulk-Power System is a possible approach to applying the Reliability Standards, the proposed rule does not define how “material impact” may be demonstrated. According to California Cogeneration, material impact will vary among Interconnections and it may vary among individual transmission systems. Therefore, California Cogeneration states that the task of defining “material impact” should be remanded by the Commission to NERC for resolution through an inclusive stakeholder process. Until that process is completed, California Cogeneration maintains that the Reliability Standards should not be finally adopted as mandatory and enforceable.

89. Various Georgia cities, which are all member systems of MEAG, state that the Commission should place reasonable limits on the applicability of the proposed Reliability Standards.

Each maintains that the Final Rule should include a rebuttable presumption that their distribution system facilities have no material effect on Bulk-Power System reliability unless established otherwise. They suggest that such a rebuttable presumption approach would fairly establish the “reasonable limits on applicability” of the Reliability Standards based on their respective sizes. Similarly, Small Entities Forum supports a rebuttable presumption that any LSE or distribution provider with less than 25 MW of load would be excluded unless a Regional Entity decides that a reason exists to include it.

See

NOPR at P 1175-76.

90. California Cogeneration states that qualifying facilities (QFs) are exempted from section 215 of the FPA. It claims that, after passage of EPAct 2005, the Commission modified its regulations to provide that QFs are exempt from all sections of the FPA except sections 205, 206, 220, 221 and 222.

Further, California Cogeneration states that the

Commission should set limits on whether a Reliability Standard applicable to a generator owner or operator also applies to operators of cogeneration facilities. According to California Cogeneration, the Commission has clearly determined that the impact by a cogenerator on the reliability of the system is limited to its net load on the system.

Therefore, California Cogeneration maintains that the Reliability Standards should reflect this limitation.

18 CFR 292.601(c).

California Cogenration at 6-7, citing

California Independent System Operator Corp.

, 96 FERC ¶ 63,015, at P 7, 24-25 (2001).

91. Finally, Small Entities Forum and Entergy state that, despite the existence of a threshold in a particular Reliability Standard, the ERO or a Regional Entity should be permitted to include an otherwise exempt facility, on a facility-by-facility basis, if it determines that the facility is needed for Bulk-Power System reliability. South Carolina E&G states that exceptions to an exemption threshold should sufficiently improve reliability so as to justify the administrative costs and other burdens. However, SMA and MidAmerican oppose allowing the ERO or its designee to include otherwise exempt facilities by making exceptions.

ii. Commission Determination

92. The Commission believes that, at the outset of this new program, it is important to have as much certainty and stability as possible regarding which users, owners and operators of the Bulk-Power System must comply with mandatory and enforceable Reliability Standards. NERC, as the ERO, has developed an approach to accomplish this through its compliance registry process. The Commission has previously found NERC's compliance registry process to be a reasonable means “to ensure that the proper entities are registered and that each knows which Commission-approved Reliability Standard(s) are applicable to it.”

ERO Certification Order

at P 689.

93. NERC has provided with its NOPR comments, and in a subsequent supplemental filing, a Statement of Compliance Registry Criteria that describes how NERC will identify organizations that may be candidates for registration and assign them to the compliance registry. For example, NERC plans to register only those distribution providers or LSEs that have a peak load of 25 MW or greater and are directly connected to the bulk electric system

are designated as a responsibility entity as part of a required underfrequency load shedding program or a required undervoltage load shedding program. For generators, NERC plans to register individual units of 20 MVA or greater that are directly connected to the bulk electric system, generating plants with an aggregate rating of 75 MVA or greater, any blackstart unit material to a restoration plan, or any generator “regardless of size, that is material to the reliability of the Bulk-Power System.”

94. The compliance registry identifies specific categories of users, owners and operators that correlate to the types of entities responsible for performing specific functions described in the NERC Functional Model.

These same functional types are also used by the ERO to identify the entities responsible for compliance with a particular Reliability Standard in the Applicability section of a given standard. Thus, each registered entity will be registered under one or more appropriate functional categories, and that registration by function will determine with which Reliability Standards—and Requirements of those Reliability Standards—the entity must comply. In other words, a user, owner or operator of the Bulk-Power System would be required to comply with each Reliability Standard that is applicable to any one of the functional types for which it is registered.

The Statement of Compliance Registry Criteria, as well as the Functional Model, identify,

inter alia

, the following functions: Balancing authority, distribution provider, generator operator, generator owner, load serving entity, planning authority, purchasing-selling entity, transmission owner, transmission operator and transmission service provider. An entity may be registered under one or more of these functions.

95. We believe that NERC has set reasonable criteria for registration and, thus, we approve the ERO's compliance registry process as an appropriate approach to allow the ERO, Regional Entities and, ultimately, the entities responsible for compliance with mandatory Reliability Standards to know which entities are responsible for initial implementation of and compliance with the new Reliability Standards. Further, based on supplemental comments of APPA, TAPS and NRECA, it appears that there is support among many of the smaller entities for the NERC compliance registry process.

Thus, at this juncture, the Commission will rely on the NERC registration process to identify the set of entities that are responsible for compliance with particular Reliability Standards.

See

Supplemental Comments of TAPS (February 13, 2007), APPA (February 14, 2007), and NRECA (February 15, 2007).

96. In sum, the ERO will identify those entities that must comply with Reliability Standards in three steps: (1) The ERO will identify and register those entities that fall under its definition of bulk electric system; (2) each registered entity will register in one or more appropriate functional categories and (3) each registered entity will comply with those Reliability Standards applicable to the functional categories in which it is registered.

97. In response to MEAG's concern that the Commission previously determined that it was not bound by the NERC compliance registry process and that there thus was uncertainty, the Commission is modifying the approach proposed in the NOPR and, as noted above, will use the NERC compliance registry to determine those users, owners and operators of the Bulk-Power System that must comply with the Reliability Standards. Each individual Reliability Standard will then identify the set of users, owners and operators of the Bulk-Power System that must comply with that standard. While the Commission may take prospective action against an entity that was not previously identified as a user, owner or operator through the NERC registration process once it has been added to the registry, the Commission will not assess penalties against an entity that has not previously been put on notice, through the NERC registration process, that it must comply with particular Reliability Standards. Under this process, if there is an entity that is not registered and NERC later discovers that the entity should have been subject to the Reliability Standards, NERC has the ability to add the entity, and possibly other entities of a similar class, to the registration list and to direct corrective action by that entity on a going-forward basis.

The Commission believes that this should prevent an entity from being subject to a penalty for violating a Reliability Standard without prior notice that it must comply with that Reliability Standard.

See

NERC Rules of Procedure, § 500.

98. As stated in the NOPR, NERC has indicated that in the future it may add to a Reliability Standard limitations on applicability based on electric facility characteristics such as generator nameplate ratings.

While the NOPR explored this approach as a means of addressing concerns over applicability to smaller entities, the Commission believes that, until the ERO submits a Reliability Standard with such a

limitation to the Commission, the NERC compliance registry process is the preferred method of determining the applicability of Reliability Standards on an entity-by-entity basis.

NOPR at P 49.

99. A number of municipalities and generation owners ask that the Commission review their particular circumstances and provide an individual waiver from compliance with the mandatory Reliability Standards. In light of our above discussion, the Commission declines to determine whether any individual municipality, generation owner or other entity is subject to a specific Reliability Standard. Rather, NERC and the Regional Entities should determine such applicability in the first instance through the registration process.

100. We agree with California Cogeneration that the Commission's regulations currently exempt most QFs from specific provisions of the FPA including section 215.

The Commission is concerned, however, whether it is appropriate to grant QFs a complete exemption from compliance with Reliability Standards that apply to other generator owners and operators. It is not clear to the Commission that for reliability purposes there is a meaningful distinction between QF and non-QF generators. While such an issue is beyond the scope of the current rulemaking, we note that, concurrent with the issuance of this Final Rule, the Commission is issuing a notice of proposed rulemaking that proposes to amend the Commission's regulation that exempts most QFs from section 215 of the FPA.

18 CFR 292.601(c).

101. Finally, the Commission agrees that, despite the existence of a voltage or demand threshold for a particular Reliability Standard, the ERO or Regional Entity should be permitted to include an otherwise exempt facility on a facility-by-facility basis if it determines that the facility is needed for Bulk-Power System reliability.

However, we note that an entity that disagrees with NERC's determination to place it in the compliance registry may submit a challenge in writing to NERC and, if still not satisfied, may lodge an appeal with the Commission.

Therefore, a small entity may appeal to the Commission if it believes it should not be required to comply with the Reliability Standards.

Demand resources deemed critical by the ERO to Bulk-Power System reliability should be included in the registry.

See ERO Certification Order at P679.

b. Ability To Accept Compliance on Behalf of Members

i. Comments

102. APPA, NERC, ELCON, APPA, TAPS and Small Entities Forum support the Commission's proposal to allow a joint action agency, generation and transmission (G&T) cooperative, or other entities to accept responsibility for compliance with Reliability Standards on behalf of their members and also may divide the responsibilities for compliance with its members. APPA states that this should also be extended to RTOs, vertically integrated utilities, and other wholesale power suppliers that perform substantial reliability functions on behalf of their full requirements wholesale customers, including public power distribution systems and other entities that currently fulfill reliability functions for customers. APPA, TAPS and Small Entities Forum state that the procedure should allow for this responsibility to be assigned on a standard-by-standard basis.

103. In response to the Commission's proposal to direct NERC to develop procedures that permit a joint action agency or similar organization to accept compliance responsibility on behalf of its members, NERC proposes the following procedure, and has updated its entity registration criteria to reflect these changes.

NERC states that each “central” organization should be able to register as being responsible for compliance for itself and collectively on behalf of its members. Each member within a central organization may separately register to be accountable for a particular reliability function defined by the standards. Under NERC's proposal, if the central organization and a member organization cannot agree that one organization or the other is responsible, or if the parties agree that the responsibilities for a particular reliability function should be split, then NERC would register both entities concurrently. NERC and the Regional Entities will then have the authority to find either organization or both accountable for a violation of a Reliability Standard, based on the facts of the case and circumstances surrounding the violation.

See

NERC comments at 53-55; NERC supplemental filing, Statement of Compliance Registry Criteria (Revision 3) at 9.

104. AMP-Ohio states that the Commission should clarify that a joint action agency should not be required to assume compliance responsibility for its members for all reliability-related functions. It asks that the Commission allow flexibility in how joint action agencies and their members allocate responsibility. TAPS states that joint action agencies should be allowed to achieve compliance with a standard at the joint action agency level rather than to simply stand in the shoes of their individual members. TAPS states that this is necessary to ensure comparable treatment for small entities in relation to large utilities. Where a joint action agency accepts compliance responsibility and a standard is susceptible to joint action agency-level assessment of compliance, the Commission should ask NERC to adopt such assessment to avoid an adverse impact on competition.

105. MEAG finds the Commission's proposal with regard to joint action agencies problematic. MEAG asserts that the proxy approach is not a universal approach to small municipal systems. For example, this option would be fundamentally inconsistent with MEAG's role as a G&T cooperative serving its member systems because MEAG has no authority to plan, physically operate, modify, maintain or test the local distribution system facilities of the member systems. Second, MEAG states that if it were to assume the role of the proxy compliance agent for the member systems and incur a fine for the failure of a few to comply with the requirements of the Reliability Standards, then the imposition of fines would lead to a rate increase to all systems, an improper and unjustifiable cost shifts among the member systems. Third, if MEAG were to err in its role as a proxy compliance agent for the member systems, MEAG could be sued and there is nothing that presently limits its liability or provides indemnification to MEAG in that circumstance. Moreover, MEAG states that the compliance-by-proxy option will not mitigate the economic impact on many small distribution-only entities because many are not members of joint action agencies.

106. Several commenters, including EEI, PJM and FirstEnergy do not oppose the Commission's proposal to allow organizations to accept compliance responsibility on behalf of members so long as compliance responsibility is clear and responsible entities are held accountable. FirstEnergy and PJM state that some Reliability Standards appear to have duplicate accountability in different organizational entities, which could create confusion and complicate operational authority and thus undermine the transmission operator chain of command required to respond quickly and decisively to system operational events. Further, FirstEnergy

states that some Reliability Standards obligate an entity to perform reliability functions when that entity may not be able to perform its reliability function due to other legal constraints. FirstEnergy states that one effective approach to resolving this problem would be to establish a “priority” of control between entities. FirstEnergy adds that entities that are subject to legal control by ISOs and RTOs should be afforded a “safe harbor” under the Reliability Standards if, during an emergency, they perform as directed by the ISO or RTO, whether under the ISO/RTO's OATT or under the ISO/RTO's authority as reliability coordinator.

ii. Commission Determination

107. The Commission directs the ERO to file procedures which permit (but do not require) an organization, such as a joint action agency, G&T cooperative or similar organization to accept compliance responsibility on behalf of its members. The Commission believes that NERC's proposed procedures described above are reasonable, and directs the ERO to submit a filing within 60 days.

In allowing a joint action agency, G&T cooperative or similar organization to accept compliance responsibility on behalf of its members, our intent is not to change existing contracts, agreements or other understandings as to who is responsible for a particular function under a Reliability Standard. Further, we clarify that there should not be overlaps in responsibility nor should there be any gaps.

Section 39.10(b) of the Commission's regulations, 18 CFR 39.10(b), provides that the Commission, upon its own motion or upon complaint, may propose a change to an ERO or Regional Entity Rule.

108. In response to concerns raised by AMP-Ohio and MEAG, the Commission clarifies that an organization is not required to assume compliance responsibility for its members for any reliability-related functions and all Reliability Standards. Moreover, under NERC's proposal, a member within a central organization may separately register to be accountable for a particular reliability function so the responsibility for reliability functions can be split. The Commission believes that this will provide flexibility and will not require an entity to assume responsibility where it is not possible to do so. We also believe that NERC's proposal adequately addresses TAPS' concern that a joint action agency should be allowed to achieve compliance at the joint action agency level. Specifically, the Statement of Compliance Registry Criteria provides that a central organization can register for all functions that it performs itself and, in addition, may register on behalf of one or more of its members for functions for which the member would otherwise be required to register.

See

NERC Supplemental Filing, Statement of Compliance Registry Criteria (Revision 3), at 8-9.

109. NERC, in developing its procedures relating to joint action agencies and similar organizations, should consider the concerns of EEI, PJM and FirstEnergy regarding the need for ensuring clear lines of responsibility. While we agree with FirstEnergy in the abstract that an entity implementing the legal directives of an ISO or RTO should not be penalized for following an ISO or RTO directive during an emergency, we will not mandate a safe harbor provision for such circumstances. Rather, these and other matters should be considered by the ERO or a Regional Entity when deciding the appropriate enforcement action in response to an event where a violation of a Reliability Standard may have occurred.

3. Definition of User of the Bulk-Power System

110. In the NOPR, the Commission did not propose a generic definition of the term “User of the Bulk-Power System.” Rather, the Commission stated that it would determine applicability on a standard-by-standard basis.

The NOPR explained that § 40.1(b) of the proposed regulations would require the ERO to identify in each proposed Reliability Standard the specific subset of users, owners and operators of the Bulk-Power System to which the proposed Reliability Standard would apply, which is NERC's current practice. The NOPR also stated that entities concerned that a particular proposed Reliability Standard would apply more broadly than the statute allows may raise their concerns in the context of the specific Reliability Standard.

NOPR at P 43.

a. Comments

111. APPA disagrees with a standard-by-standard approach to defining the term “user of the Bulk-Power System” because it would go beyond those facilities that are required to maintain the reliability of the high-voltage, bulk transmission system and intrude into state and local matters and trespass on state jurisdiction. According to APPA, the Reliability Standards themselves state their applicability in terms of the Functional Model, which does not include size limitations in the various functional categories included in it. Without some type of outer limit on the “user of the Bulk-Power System” definition, all such entities regardless of size or their impact on the Bulk-Power System, must review every proposed Reliability Standard and protest every time they have a “concern in the context of the specific Reliability Standard.” They must also retain permanent staff or consultants to evaluate new or revised standards. Rather, APPA, as does TANC, urges the Commission to support NERC's registry criteria to make the definition of “users of the Bulk-Power System” co-extensive with the users on NERC's compliance registry.

112. SMA is concerned that not specifically defining who is a “user of the Bulk-Power System” will not provide timely notice to entities that are not the parties historically responsible for implementing NERC's prior reliability standards. SMA states that NERC must identify the subset of users that must comply with any given Reliability Standard at a sufficiently early stage for all such affected parties to have an opportunity to raise objections to the sweep or content of the Reliability Standard while approval of that Reliability Standard is under consideration. SMA also argues that NERC's Rules of Procedure must require actual notice to an entity before it is placed on the compliance registry.

113. Southwest TDUs urges the Commission to clarify that “users” are entities that have more involvement with it than merely receiving power from it. Since these Reliability Standards will become mandatory and violation of any of them can be accompanied by economically significant penalties, Southwest TDUs urges the Commission to make every effort to be specific about what constitutes a “user.”

114. California Cogeneration states that the Commission has not provided any detail as to how a “user” will be identified. The NOPR and the NERC Reliability Standards it proposes to adopt rely on the broad entities identified in the NERC Functional Model. According to California Cogeneration, using only the NERC Functional Model provides no detail and no differentiation in the applicability of each Reliability Standard. While a single definition of “user” may not be appropriate, California Cogeneration maintains that using only the fixed designations within the NERC Functional Model does not provide sufficient specificity. The terms “Generator Owner” and “Generation Operator” also must be qualified so that they only apply to generation operations that utilize the grid and exclude

generation output dedicated to on-site consumption.

b. Commission Determination

115. The Commission's determination above to rely on the ERO's compliance registry process to identify users, owners and operators of the Bulk-Power System that must comply with new mandatory and enforceable Reliability Standards should resolve the concerns expressed by APPA, SMA and others regarding the need to identify and provide timely notice to those users of the Bulk-Power System that are expected to comply with specific Reliability Standards.

116. While we recognize the desire of some commenters for a concise, generic definition of “user of the Bulk-Power System,” we are concerned that any attempt to define the term at this time will either be overly broad so as not to provide any helpful guidance or overly narrow so as to exclude entities that should be covered. The Commission believes that it has employed a reasonable approach by endorsing NERC's compliance registry process and requiring that each Reliability Standard identify the subset of users, owners and operators to whom that particular Reliability Standard applies.

4. Use of the NERC Functional Model

117. NERC has developed a “Functional Model” that defines the set of functions that must be performed to ensure the reliability of the Bulk-Power System. The Functional Model identifies 14 functions and the name of a corresponding entity responsible for fulfilling each function.

118. In the NOPR, the Commission proposed to use the NERC Functional Model to identify the applicable entities to which each Reliability Standard applies.

The Commission explained that focusing on the functions an entity performs to identify what entities are users, owners and operators of the Bulk-Power System, and thus what entities are subject to the Reliability Standards, provides a useful level of detail and appears to be more practical than simply identifying an applicable entity as a user, owner or operator. In addition, the NOPR recognized concerns that the Functional Model may contain ambiguities and proposed to require NERC to specifically address these concerns.

NOPR at P 46-48.

119. The Commission proposed that, because the Functional Model is linked to applicability of the Reliability Standards, the ERO should submit for Commission approval any future modifications to the Functional Model that may affect the applicability of the Reliability Standards.

a. Filing the Functional Model With the Commission

i. Comments

120. NERC states that, while it believes that the Functional Model should be filed for informational purposes only, it will submit any changes to the Functional Model to the Commission for approval as requested. While NERC states that the Functional Model will not function as a legally binding document like a Reliability Standard, the Commission's approval of this reference document and of any changes to the Functional Model will support the development of high quality, enforceable and technically sufficient standards.

121. Several commenters, including NERC, EEI, APPA, MidAmerican, National Grid and MRO state that the Functional Model is not part of the Reliability Standards and should be filed with the Commission for informational purposes only. They generally state that the Functional Model is not a definitive guide to the “users, owners and operators” of the Bulk-Power System and should not be used to establish obligations under section 215, which should be established within each individual Commission-approved Reliability Standard.

122. Northeast Utilities is concerned with the Commission's proposal to use the NERC Functional Model to identify applicable entities. It believes that the Functional Model can be useful in drafting standards, but it is not a substitute for having clear definitions of the entities responsible for compliance with the requirements for each Reliability Standard within a region. The entities responsible for meeting the standard may vary depending on how the Bulk-Power System is operated. FirstEnergy states that the Functional Model may not clearly or correctly identify the entities to which a Reliability Standard applies and maintains that the Functional Model should be applied only where all of the affected stakeholders agree on the final classifications of each Registered Entity's roles and responsibilities.

123. In contrast, TANC and ISO-NE state that the Commission should require that any future modification to the Functional Model that could affect the categories of entities that must comply with a particular Reliability Standard be approved by the Commission because the Functional Model is so closely interrelated with the applicability of each Reliability Standard.

124. APPA, TAPS and ReliabilityFirst maintain that any modification to the NERC Functional Model should be reviewed and approved through the Reliability Standards development process. According to ReliabilityFirst, any change to the Functional Model is essentially an amendment to the Reliability Standard made outside the ERO process. TANC asserts that a Reliability Standard will only be complete if the definitions of the Functional Model are developed through the Reliability Standards development process just like any Reliability Standard. APPA would allow NERC to issue interpretations of the Functional Model, but these interpretations should then be confirmed through NERC procedures.

125. TAPS cautions that, because the Functional Model includes no express size limitations, NERC and the Commission can rely on the Functional Model to define applicability of standards only if such limits are imposed by NERC's compliance registry criteria and its bulk electric system definition. The Small Entities Forum is concerned because smaller entities have historically performed only a subset of functions. For example, it states that some joint action agencies invest in transmission facilities that are operated by others, but that these joint action agencies, under the Functional Model, would have to verify that these facilities, operated by others, are being operated and maintained according to applicable Reliability Standards.

126. Several commenters argue that the Functional Model contains a number of ambiguities. MISO argues that the definition of the term planning coordinator is circular and may lead to one subset of the transmission system having multiple Planning Coordinators. MISO recommends that the Commission direct NERC to survey the industry to identify the planning roles that actually exist in the industry and clarify the role of the wide-area Planning Coordinator. MISO and Wisconsin Electric note that the proposed Reliability Standards do not specify who fulfills the Interchange Authority or Planning Authority roles, and there is no common industry understanding of those roles. Finally, California Cogeneration states that the definition of LSE is too inclusive and should be modified to exclude entities providing service only to loads on-site or pursuant to private contract.

ii. Commission Determination

127. The Commission accepts the characterization offered by numerous commenters that the Functional Model is an evolving guidance document that is not intended to convey firm rights and responsibilities. Further, we agree that the applicability section of a particular Reliability Standard should be the ultimate determinant of applicability of each Reliability Standard. In light of this, we will not require the ERO to submit revisions of the Functional Model for Commission approval. While some commenters suggest that revisions be filed for informational purposes, we see little value in mandating such a filing.

We note that NERC has available on its Web site,

http://www/nerc.com

, the current version of the Functional Model. We expect NERC to continue to do so in the future.

128. With regard to the comments of TAPS, APPA, TANC and others on whether revisions to the Functional Model should be made through the ERO's Reliability Standards development process, we do not believe that it is necessary under the statute, since applicability will be determined at this time by the specifications of the Reliability Standards and the compliance registry process. Thus, we leave to the discretion of the ERO the appropriate means of allowing stakeholder input when revising the Functional Model. To the extent that changes in the Functional Model require revised specification in the Reliability Standards, the latter will be addressed in the Reliability Standards development process.

129. While TAPS and Small Entities Forum raise concerns regarding the absence of size limitations in the Functional Model and potential negative impacts on small entities, we believe that these concerns are addressed above in our decision regarding use of the NERC compliance registry process. MISO, Wisconsin Electric and others comment on the need to clarify certain ambiguities in the Functional Model. Given that the Functional Model is an evolving guidance document, the ERO can address such concerns as it updates and revises the Functional Model.

b. Responsibility for Functions Within the Functional Model

130. In the NOPR, the Commission explained that, in the context of an ISO or RTO or any organization that pools resources, decision-making and implementation are performed by separate groups.

The ISO or RTO typically makes decisions for the transmission operator and, to a lesser extent, the generation operator, while actual implementation is performed by either local transmission control centers or independent generation control centers. The NOPR proposed that “all control centers and organizations that are necessary for the actual implementation of the decisions or are needed for operation and maintenance made by the ISO or RTO or the pooled resource organizations are part of the transmission or generation operator function in the Functional Model.”

NOPR at P 236.

. at P 237. Although discussed in the context of the communication (COM) Reliability Standards, the NOPR suggested that the proposal would apply to other Reliability Standards. Because of the nature of the comments on the issue and its relationship to the Functional Model, we discuss the matter here.

i. Comments

131. A number of commenters raise concerns or seek clarification regarding the relationship between the Functional Model and existing agreements that set forth the responsibility of various entities, particularly in the context of ISO and RTO operations. MISO requests the Commission to clarify that nothing in the Functional Model requires one entity to be responsible for all of the tasks within a function, regardless of who actually performs the task. In those ISOs and RTOs where balancing authorities have retained and have never delegated to the RTO certain tasks that fall within the balancing authority function, NERC's Functional Model should only require one responsible entity per task rather than one responsible entity for all of the tasks within that function. MISO submits that the NERC Functional Model should not play a prescriptive role by assigning responsibility for a given task where such an assignment would be inconsistent with a Commission-approved regional transmission agreement, RTO tariff, or reliability plan filed with NERC, all of which specify the entity performing each task.

132. PJM states that, while the Commission proposed to assign responsibility for reliable operations to multiple entities within an ISO or RTO to address its concern that decision making and implementation are performed by separate organizations, it does not believe that increasing the number of organizations responsible for a given function for the same facilities within the bulk electric system has been shown to be an effective or appropriate solution to the concerns cited. PJM states that NERC employs processes that successfully manage the delegation of operational tasks while maintaining single entity accountability for the reliable performance of those operational tasks.

133. ATC states that Regional Entities should be given the flexibility to allow some “tasks” within a “function” to be performed by one entity, with the remaining tasks to be performed by another entity. According to ATC, this would provide entities—particularly smaller ones—with the flexibility to transfer their responsibility for a reliability task or function to another registered entity that can perform the work more effectively. Further, ATC maintains, Regional Entities should ensure that entities be given accountability only for systems, facilities and functions over which they actually have control.

134. NPCC states that requirements applicable to local control centers should be distinct from requirements applicable to transmission and generation operators under the NERC Functional Model. NPCC submits that there is a difference between being assigned to do a task and being responsible for the completion of that task. An organization that registers with NERC as performing a function is considered a responsible entity and must ensure that all tasks are performed. While an organization may delegate a task to another organization, it may not delegate its responsibility for ensuring that the task is accomplished.

135. According to Ontario IESO, the Commission's proposal is inconsistent with the NERC Functional Model, which envisions one responsible entity for each reliability function. In contrast, the Commission's proposal would split the same function between different organizations such as an ISO and a local control center. PJM claims that, under the Functional Model, single entity registration is a foundational cornerstone for ensuring clear responsibility and accountability for compliance with Reliability Standards.

136. Ontario IESO asserts that the Commission's proposal is also problematic because in the event of a violation it will be difficult to determine who violated the Reliability Standard—the entity making the decision or the entity implementing the decision. Ontario IESO argues that, although the NERC Functional Model is not foolproof, it avoids complications by distinguishing between responsibility and performance. The ISO is the responsible entity and it delegates some of its tasks to local control centers, but retains the overall responsibility.

137. According to Ontario IESO, NERC has recognized that, although

organizations such as local control centers play an important role in reliability, they are not responsible entities. Therefore, NERC has made such organizations subject to compliance audits and placed other requirements on them. In addition, NERC intends that the regional reliability plans will document the relationships between the local control centers and the entity that delegates its responsibility to such centers. The current framework has a mechanism for accommodating reliability considerations for organizations such as local control centers. In this regard, NERC's ongoing formal certification of reliability coordinator, balancing authority and transmission provider will be useful in determining any delegation of tasks to local control centers that must take place for a clear demarcation of responsibilities. Ontario IESO advises that, since NERC has not finished this task, the Commission should defer its decision in this regard.

138. ISO/RTO Council states that the Commission should not use the term “local control center” because it will cause confusion. The NERC Functional Model does not define the term and it means different things in different regions. For example, in MISO, which consists of 25 balancing areas, “local control center” is an equivalent term for balancing area although this was probably not the Commission's intent in the NOPR. Therefore, ISO/RTO Council argues that the Reliability Standards should be limited to defining the tasks in the context of users, owners and operators of the Bulk-Power System; any delegation of responsibilities to a local control center or any other organization should take place in the context of ISO/RTO governing documents, operating agreements, tariffs and other arrangements with transmission owners and related stakeholders. This approach, according to ISO/RTO Council will address the Commission's concerns with respect to local control centers without preempting possible regional solutions.

139. FirstEnergy believes that, while independent authority to operate the transmission system should be self-evident, in RTO environments with local control centers, the tasks performed by each entity do not encompass the entirety of tasks performed by the transmission operator under the Functional Model. It suggests that NERC should revise the Functional Model to create certification and registration requirements for local control authorities within RTOs that perform real-time operations of the transmission system. FirstEnergy states that a revised NERC Functional Model should recognize local control centers that take some direction from RTOs yet maintain authority to act independently to carry-out functional tasks that require real-time operation of the system. According to FirstEnergy, the required registration and certification of such entities would clearly indicate the need for operational personnel in these control rooms to be NERC-certified. It concludes that at a minimum, a NERC certification for the tasks performed by such local control center individuals would be an enhancement over the current situation.

140. ISO-NE argues that the Commission should not mandate that the tasks performed by local control centers be included in the definition of transmission operator because to do so would be to suggest that a local control center has independent autonomy in operating the Bulk Power System which would conflict with the “one set of hands on the wheel” philosophy. It explains that local control center personnel in New England implement tasks delegated to them by ISO-NE for operation of designated transmission facilities. Therefore, ISO-NE submits, the scope of the Reliability Standard need not be expanded.

ii. Commission Determination

141. In response to the many concerns of commenters, the Commission clarifies that it did not intend to change existing contracts, impose new organizational structures or otherwise affect existing agreements that set forth the responsibilities of various entities. Rather, its intent was to allow enough granularity in the definitions so that the appropriate user, owner or operator of the Bulk-Power System would be identified for each Reliability Standard. We agree also with MISO's statement that nothing in the Functional Model requires one entity to be responsible for all of the tasks within a function, regardless of who actually performs the task.

142. The Commission's concern is that, particularly in the ISO, RTO and pooled resource context, there should be neither unintended redundancy nor gaps for responsibilities within a function. In particular, the Commission is concerned that such “gaps” could occur in the context of several Reliability Standards addressing matters related to activities other than directing or implementing real-time operations.

For example, the involvement of a transmission operator at an ISO or RTO with respect to the requirements related to telecommunications facilities (COM-001-1) from the local control room and blackstart restoration plans (EOP-005-0) may be minimal. Because the operators at local control centers actually perform all or most of the tasks contemplated under various Reliability Standards, we are concerned that there may be unintended gaps in such responsibilities if the existing contracts between the ISO or RTO and owners of the facilities do not address such responsibilities.

See

e.g.

, CIP-001—Sabotage Reporting; COM-001—Telecommunications; EOP-003—Load Shedding Plans; EOP-004—Disturbance Reporting; EOP-005—System Restoration Plans; EOP-008—Plans for Loss of Control Center Functionality; PRC-001—System Protection Coordination; PRC-007—Assessing Consistency with Entity Underfrequency Load Shedding Programs with Regional Reliability Organizations UFLS Program Requirements; PRC-009—Analysis and Documentation of Underfrequency Load Shedding Performance Following an Underfrequency Event; PRC-010—Technical Assessment of the Design and Effectiveness of Undervoltage Load Shedding Program; PRC-022—UFLS Program Performance; and TOP-006—Monitoring System Conditions.

143. In response to MISO, we did not intend to be prescriptive in assigning tasks to specific entities. The intent was to allow flexibility in identifying the actual user, owner or operator of the Bulk-Power System that would be responsible for complying with the Requirements in the Reliability Standards. One approach could be that the RTO, ISO or other pooled resource registers as the transmission operator pursuant to the NERC compliance registry process and, while retaining ultimate responsibility, assigns specific tasks to be performed by what are sometimes known as local control centers or other relevant organizations. Alternatively, the local control center operators could register together with the RTO, ISO or pooled resources as transmission operators clearly delineating their specific responsibilities with regard to the Requirements of particular Reliability Standards. Such joint registration must assure that there is no overlap between the decisionmaking and implementation functions,

i.e.

, that there are not two sets of hands on the wheel. Again, our intent is to ensure that there is neither redundancy nor gap in responsibility for compliance with the Requirements of a Reliability Standard, while allowing entities flexibility to determine how best to accomplish this goal.

144. Consistent with our above explanation, we agree with NPCC that there is a difference between being assigned to perform a task and being responsible for completing the task. The organization that registers with NERC to perform a function will be the

responsible entity and, while it may delegate the performance of that task to another, it may not delegate its responsibility for ensuring the task is completed.

145. Accordingly, the Commission directs that the ERO, in registering RTOs, ISOs and pooled resource organizations (or, indeed in registering any entity), assure that there is clarity in the assigning responsibility and that there are no gaps or unnecessary redundancies with regard to the entity or entities responsible for compliance with the Requirements of each relevant Reliability Standard. Accordingly, although the Commission is not requiring NERC to amend the Functional Model, we believe our concerns can be addressed by having the ERO, through its compliance registry process, ensure that each user, owner and operator of the Bulk-Power System is registered for each Requirement in the Reliability Standards that relate to transmission owners to assure there are no gaps in coverage of the type discussed here.

5. Regional Reliability Organizations

146. The NOPR stated that 28 proposed Reliability Standards would apply, in whole or in part, to a regional reliability organization.

Further, many of the proposed Reliability Standards that have compliance measures refer to the regional reliability organization as a compliance monitor. The Commission stated in the NOPR that it was not persuaded that a regional reliability organization's compliance with a Reliability Standard can be enforced as proposed by NERC because it does not appear that a regional reliability organization is a user, owner or operator of the Bulk-Power System.

NOPR at P 54.

147. The Commission proposed to approve and direct modification of five Reliability Standards that apply partially to regional reliability organizations. For the other Reliability Standards that apply to regional reliability organizations, the Commission proposed, as an interim measure, to direct the ERO to use its authority pursuant to § 39.2(d) of our regulations to require users, owners and operators to provide to the regional reliability organizations information related to data gathering, data maintenance, reliability assessments and other process-type functions. The NOPR explained that this approach is necessary to ensure that there will be no gap during the transition from the current voluntary system to a mandatory system in which Reliability Standards are enforced by the ERO and Regional Entities. The NOPR proposed that, in the long run, Regional Entities should be made responsible, through delegation from the ERO, for the functions currently performed by the regional reliability organizations. To implement this, the Commission proposed the modification of delegation agreements to require the Regional Entities to assume responsibility for noncompliance. In addition, the Commission proposed that the Reliability Standards should be modified to apply to the users, owners and operators of the Bulk-Power System that are responsible for providing information. The Commission proposed to require that any Reliability Standard that references a regional reliability organization as a compliance monitor be modified to refer to the ERO as the compliance monitor.

148. The Commission stated that, while it is important that the existing regional reliability organizations continue to fulfill their current roles during the transition to a regime where Reliability Standards are mandatory and enforceable, the Commission does not understand why, once the transition is complete, a regional reliability organization should play a role separate from a Regional Entity whose function and responsibility is explicitly recognized by section 215 of the FPA. The Commission sought comment on whether there is any need to maintain separate roles for regional reliability organizations with regard to establishing and enforcing Reliability Standards under section 215.

a. Comments

149. NERC believes it can remove references to regional reliability organizations and Regional Entities from the Reliability Standards, with the exception of retaining the Regional Entities as the compliance enforcement authorities. However, NERC and California PUC request that the Commission reconsider its proposal to direct that the ERO be listed as the compliance monitor in each Reliability Standard. California PUC states that naming NERC as the compliance monitor deprives the Regional Entities of their enforcement role under section 215. NERC believes it will be clearer, and consistent with the delegation agreements, to designate the Regional Entity as the compliance monitor in almost all Reliability Standards. According to NERC, this would also be helpful to distinguish those few Reliability Standards that are monitored directly by NERC.

150. ReliabilityFirst, TANC and SoCal Edison agree with the Commission that regional reliability organizations and Regional Entities cannot be users, owners or operators of the Bulk-Power System and should not be subject to compliance with Reliability Standards. TANC states that Reliability Standards that reference a regional reliability organization need to be revised to reference a user, owner or operator of the Bulk-Power System in order to comply with the statute.

151. EEI agrees with the Commission's proposal to direct the ERO to require users, owners and operators to provide the information related to data gathering, data maintenance, reliability assessments and other process-type functions that previously have applied to regional reliability organizations. EEI also agrees that, in the long run, it is appropriate to make the Regional Entities responsible through delegation from the ERO for various functions now performed by regional reliability organizations. In doing so, and during the transition in particular, EEI maintains that it is important that functions now performed by the regional councils, such as planning, be continued.

152. A number of commenters discuss the possible ongoing role for a regional reliability organization. For example, Ontario IESO, NPCC and National Grid state that the Commission should recognize that the regional reliability organizations will continue to play a role in areas including developing regional reliability plans and adequacy requirements that are outside the jurisdiction of the ERO. NPCC states that enforcement of adequacy requirements should continue to reside with the regional reliability organization. National Grid states that the role of regional reliability organizations can be preserved in a variety of ways, including requiring obligations currently imposed upon regional reliability organizations to be included in the regional delegation agreements.

153. NPCC further maintains that regional reliability organizations should continue to function as regional sites for technical expertise for enhanced reliability requirements through adopting regionally-specific criteria. According to NPCC, eliminating the ability for regions to develop and propose new criteria that enhance system reliability would edge the system closer towards the lowest common denominator rather than striving towards operational excellence. Further, Ontario IESO and NPCC state that regional reliability organizations

should be allowed to perform certain functions for their members, such as system operator workshops, forums for coordination of operations and planning and operational readiness conference calls.

154. Massachusetts DTE comments that a regional reliability organization should be allowed to propose a Reliability Standard that may exceed or enhance the proposed mandatory Reliability Standards to ensure regional reliability. It further states that any regional reliability criteria proposed by a regional reliability organization should be vetted through a regional stakeholder process and then specifically adopted by the appropriate state regulatory authorities.

155. Although MRO does not oppose regional reliability organizations, with regard to establishing and enforcing mandatory Reliability Standards, MRO, Constellation and Xcel state that there is no need to maintain a separate role for regional reliability organizations. Because Regional Entities may perform non-reliability functions, Constellation states that maintaining regional reliability organizations will result in unnecessary cost. While Constellation has no objection to the Regional Entities performing non-statutory functions, it states that the Commission should not allow Regional Entities to impose Reliability Standards developed by the regional reliability organizations as mandatory Reliability Standards.

156. MidAmerican believes that it will be important to separate the compliance functions of the Regional Entities from non-compliance functions currently assigned to the regional reliability organizations. It states that this can be done by: (1) Separating these functions internally in the Regional Entities; (2) separating these functions in different organizations; or (3) separating these functions by assigning non-compliance related functions currently assigned to the regional reliability organizations to other users, owners and operators. This will minimize conflicts between the Regional Entity core compliance function and the non-compliance regional reliability organization requirements.

b. Commission Determination

157. The Commission adopts the NOPR proposal to eliminate references to the regional reliability organization as a responsible entity in the Reliability Standards. We conclude that this approach is appropriate because, as explained in the NOPR, such entities are not users, owners or operators of the Bulk-Power System. NERC indicates that it can remove such references, except that the Regional Entity should be identified as the compliance monitor where appropriate. While the Commission originally proposed that the ERO should be designated as the compliance monitor, we agree with NERC's approach and believe that identifying the Regional Entity as the compliance monitor will provide useful specificity as to which entity will be immediately tasked with monitoring compliance with a particular Reliability Standard. However, as we stated in Order No. 672, the ERO retains responsibility to ensure that a Regional Entity implements its enforcement program in a consistent manner, and to periodically review the Regional Entity's enforcement activities.

Order No. 672 at P 654.

158. For those Reliability Standards that identify the regional reliability organization as the sole applicable entity, and that relate to data gathering, data maintenance, reliability assessments and other process-type functions,

the NOPR proposed:

EOP-007, MOD-011, MOD-013, MOD-014, MOD-015, MOD-024, MOD-025, PRC-002, PRC-003, PRC-006, PRC-012, PRC-013, PRC-014, PRC-020, TPL-005 and TPL-006.

as an interim measure * * * to direct the ERO to use its authority pursuant to § 39.2(d) of our regulations to require users, owners and operators to provide to the regional reliability organizations the information related to data gathering, data maintenance, reliability assessments and other “process”-type functions. We believe that this approach is necessary to ensure that there will be no “gap” during the transition from the current voluntary reliability model to a mandatory system in which Reliability Standards are enforced by the ERO and Regional Entities. In the long run, we propose to make the Regional Entities responsible, through delegation by the ERO, for the functions currently performed by the regional reliability organizations. As part of this change, the delegation agreements to the Regional Entities should be modified to bind the Regional Entities to assume these duties and responsibility for noncompliance. In addition, the Reliability Standards should be modified to apply through the Functional Model, to the users, owners and operators of the Bulk-Power System that are responsible for providing information.

NOPR at P 57 (footnotes omitted).

159. We continue to believe that this is a reasonable interim measure, and note that EEI and others support this approach. To ensure that the ERO properly and timely addresses this matter, we direct the ERO to submit an informational filing within 90 days of the Final Rule that describes its plan and schedule for developing both an interim and long-term resolution based upon the above direction.

160. In response to the Commission's inquiry in the NOPR, commenters identify a number of possible continuing roles for regional reliability organizations. Such activities are beyond the scope of this proceeding. Clearly, any such role must be limited to non-statutory functions. Some commenters suggest that regional reliability organizations may have a role in developing voluntary criteria. Regional reliability organizations should not develop voluntary criteria that address the same or similar matters as mandatory and enforceable Reliability Standards, because that is the responsibility of the Regional Entities.

See ERO Certification Order

at P 281.

D. Mandatory Reliability Standards

1. Legal Standard for Approval of Reliability Standards

161. The NOPR explained that section 215(d)(2) of the FPA states that the Commission may approve a Reliability Standard if it determines that it is just, reasonable, not unduly discriminatory or preferential and in the public interest. Further, Order No. 672 laid out a series of factors it would consider when assessing whether to approve or remand a Reliability Standard.

Order No. 672 at P 262, 321-37.

162. In response to NERC's suggestion that a proposed Reliability Standard developed through its open and inclusive process is assured to be “just, reasonable, and not unduly discriminatory or preferential,” the NOPR explained that:

While an open and transparent process certainly is extremely important to the overall success of implementing section 215 of the FPA, an evaluation of any proposed Reliability Standard must focus primarily on matters of substance rather than procedure. We will, therefore, review each Reliability Standard in addition to the process through which it was approved by NERC to ensure that the Reliability Standard is just, reasonable, not unduly discriminatory or preferential, and in the public interest.

NOPR at P 74.

163. Further, with regard to NERC's “benchmarks” for evaluating a proposed Reliability Standard,

the Commission explained that it would not be constrained by such benchmarks in approving or remanding a proposed Reliability Standard. Rather, Order No. 672 identified factors that the Commission will consider when determining whether a proposed

Reliability Standard satisfies the statutory requirements.

. at P 9-12. The benchmarks are: applicability, purpose, performance requirements, measurability, technical basis in engineering and operations, completeness, consequences for noncompliance, clear language, practicality, and consistent terminology.

a. Comments

164. NERC states that 83 of the Reliability Standards are “just, reasonable, not unduly discriminatory or preferential, and in the public interest,” and should therefore be approved and made effective as mandatory Reliability Standards. NERC believes that, by following NERC's Reliability Standards development process, a Reliability Standard should meet the requirement that a standard be “just, reasonable, not unduly discriminatory or preferential.” Further, NERC asserts that, by filing with the Commission the written record of development for each Reliability Standard, NERC has given the Commission strong evidence that those 83 Reliability Standards are just, reasonable, and not unduly discriminatory or preferential.

165. NERC states that the requirement that a Reliability Standard be “in the public interest” provides the Commission with broad discretion to review and approve a Reliability Standard. According to NERC, implicit in the “public interest” test is that a Reliability Standard is technically sound and ensures an adequate level of reliability, and that the Reliability Standards provides a comprehensive and complete set of technically sound requirements that establish an acceptable threshold of performance necessary to ensure reliability of the Bulk-Power System. NERC states that it believes that approving those 83 Reliability Standards as enforceable as NERC begins operating as the ERO meets this objective and will achieve an adequate level of reliability as required by law. NERC asserts that adopting fewer of the Reliability Standards would both create potential reliability risks and communicate that some aspects of reliability are not viewed as important enough to be the subject of mandatory and enforceable Reliability Standards under the FPA.

166. FirstEnergy states that each proposed standard should be reviewed against the following criteria: (1) Clarity; (2) technical means to comply; (3) practicability; (4) consistency and (5) costs.

b. Commission Determination

167. The Commission agrees with NERC that an open and transparent process is important in implementing section 215 of the FPA and developing proposed mandatory Reliability Standards. However, in Order No. 672, the Commission rejected the presumption that a proposed Reliability Standard developed through an ANSI-certified process automatically satisfies the statutory standard of review.

The Commission reiterates that simply because a proposed Reliability Standard has been developed through an adequate process does not mean that it is adequate as a substantive matter in protecting reliability. We will, therefore, review each Reliability Standard to ensure that the Reliability Standard is just, reasonable, not unduly discriminatory or preferential, and in the public interest, giving due weight to the ERO.

Order No. 672 at P 338.

168. In response to FirstEnergy, the Commission has already laid out the factors against which to review a Reliability Standard, as well as other considerations.

The Commission has no need to revisit this issue.

. at P 262, 321-37. (A proposed Reliability Standard must: (1) Provide for the Reliable Operation of Bulk-Power System facilities; (2) be designed to achieve a specified reliability goal and must contain a technically sound means to achieve this goal; (3) be clear and unambiguous regarding what is required and who is required to comply; (4) clearly state the possible consequences for violating the proposed Reliability Standard; (5) include a clear criterion or measure of whether an entity is in compliance with a proposed Reliability Standard; (6) achieve its reliability goal effectively and efficiently; (7) not reflect the “lowest common denominator.”)

2. Commission Options When Acting on a Reliability Standard

169. In the NOPR, the Commission proposed that, for this rulemaking, it would take one of four actions with regard to each proposed Reliability Standard: (1) Approve; (2) approve as mandatory and enforceable; and direct modification pursuant to section 215(d)(5); (3) request additional information; or (4) remand. In fact, the NOPR did not propose to remand any proposed Reliability Standard.

NOPR at P 78-82.

170. With regard to the second category, the Commission explained that it would take two separate and distinct actions under the statute. First, pursuant to section 215(d)(2) of the FPA, the Commission would approve a proposed Reliability Standard, which would be mandatory and enforceable upon the effective date of the Final Rule. Second, the Commission would direct NERC to submit a modification of the Reliability Standard to address specific issues or concerns identified by the Commission pursuant to section 215(d)(5) of the FPA.

171. With regard to the third category, “request additional information,” the NOPR explained that some Reliability Standards do not contain sufficient information to enable the Commission to propose a disposition. For those Reliability Standards, the Commission identified the needed information, and proposed not to approve or remand these Reliability Standards until all the relevant information is received. As an example, the NOPR explained that many of the fill-in-the-blank standards would not be approved or remanded until the Commission had received all the necessary information.

a. Comments

172. Most commenters generally support the Commission's proposal to have four courses of action it may take on a Reliability Standard. However, Xcel has concerns about the legality of approving many of the proposed Reliability Standards as mandatory but, at the same time, ordering the ERO to make specific modifications to them. According to Xcel, section 215(d) does not expressly create this “approve but modify” option. To the contrary, section 215(d)(4) suggests that the Commission should remand to the ERO a standard that it disapproves “in whole or in part.”

173. While many commenters support the Commission proposal to approve certain Reliability Standards as mandatory and enforceable; and direct NERC to modify them pursuant to section 215(d)(5), they are concerned that the Commission's directives to modify certain Reliability Standards are too prescriptive.

They contend that, in prescribing particular requirements, metrics, or specific language to be used, the Commission is setting the Reliability Standard outside the open Reliability Standards development process and not giving due weight to the ERO under section 215 of the FPA. NRECA, for example, argues there is a major distinction between (a) requiring a Reliability Standard to address a specific matter and (b) requiring (as opposed to suggesting) a specific Reliability Standard or requiring a reliability matter to be addressed in a specific way. These commenters ask that the Final Rule state that a directive to improve a Reliability Standards be in the form of an objective to be achieved or concern or deficiency to be resolved within the Reliability Standard, rather than a particular requirement, metric, or specific language to be used.

See

e.g.

, NERC, Entergy, EEI, APPA, National Grid, NRECA, TAPS, ISO-NE and Duke.

174. Many commenters request that the Commission require that changes to any Reliability Standard be made through NERC's Reliability Standard

development procedure.

NERC states that there are areas where the Commission proposes a specific directive on a particular Reliability Standard that is well beyond the bounds of current utility practice. According to NERC, these recommendations are often derived from the Staff Preliminary Assessment or are based on a limited number of comments to that assessment. NERC anticipates that the issue of concern with respect to these Reliability Standards will be addressed, but the results may be somewhat different than anticipated by the Commission. Similarly, EEI and Progress state that NERC should not pre-determine the outcome of the Reliability Standard development procedure in response to the Commission's guidance. Ontario IESO states that the Commission should allow its detailed input on the proposed Reliability Standards to be considered through Reliability Standards development process.

See, e.g.

, NERC, EEI, ELCON, CEA, NYSRC, TVA, LPPC, NPCC, Ontario IESO, Constellation, Progress and Dynegy.

175. According to EEI, NERC should be permitted to provide, if the Commission's guidance for modification of a proposed Reliability Standard is not adopted in the Reliability Standard development procedure, an explanation for that outcome when it submits the modified standard to the Commission for approval. Constellation asks the Commission to clarify that, if the ERO Reliability Standards development process does not result in a Reliability Standard that includes the Commission's proposed modifications, the existing Reliability Standard would remain in effect until such time as NERC proposes and the Commission approves a different Reliability Standard (approved through the Reliability Standards development process).

176. Manitoba and Northwest Requirements Utilities disagree with the Commission's proposal to approve certain Reliability Standards and, separately, direct NERC to make modifications. Some commenters, such as California PUC, Northwest Requirements Utilities and SMA state that the users, owners and operators of the Bulk-Power System should not be expected to comply with Reliability Standards that are not finalized or need modification. Northwest Requirements Utilities contends that complete and clear Reliability Standards and requirements are necessary to fair enforcement, particularly if monetary sanctions may apply. Manitoba and California PUC state that approving Reliability Standards that still require modification would lead to differing interpretations of the Reliability Standards and confusion.

177. CEA asserts that the proposed directives to modify certain Reliability Standards, while not remands, reflect engagement in the standards-setting process that may interfere with the ERO's ability to effectively function as an international body. For example, Manitoba states that the Commission's proposed modifications without industry input may unintentionally place Manitoba in a position where it must recommend that the Government of Manitoba disallow the Commission's prescribed modifications to several NERC Reliability Standards, thus creating discrepancies between Reliability Standards across North America.

178. FirstEnergy agrees with the Commission's rejection of the concept of “conditional approval” in favor of approve but modify to ensure that enforceable standards are in place. However, it asks that the Commission consider waiving, or at least substantially reducing, penalties for violations of some enforceable, but yet-to-be-completed or modified Reliability Standards because compliance with such Reliability Standards may prove difficult to determine. FirstEnergy therefore suggests that the Commission exercise due discretion in enforcing affected Reliability Standards, especially where the Commission itself has found that a standard is incomplete or ambiguous. International Transmission agrees that in instances where the Commission has proposed material changes to a Reliability Standard and its associated measurements, risk factors and Levels of Non-Compliance, it may be appropriate for the ERO to exercise enforcement discretion on a case-by-case basis.

179. SoCal Edison is concerned that entities may not have an opportunity to (1) review the Reliability Standards that are adopted in the Final Rule and (2) make any necessary changes in their operating or planning practices in order to incorporate differences between the NOPR and the Final Rule. SoCal Edison recommends the Commission specifically state the “effective date” for compliance with each Reliability Standard in its Final Rule. SoCal Edison is concerned because some standards have a proposed NERC “effective” date after the Final Rule.

180. Northern Indiana states it is concerned how a June 2007 effective date will impact electric system reliability during the critical summer peak demand period, particularly given the many problems with the standards that have been identified. Northern Indiana believes the Commission's current actions may, in the near term, create a lower probability of success in achieving the Commission's stated objectives. Northern Indiana suggests that the traditional summer peak season is not a good time to implement broad changes in electric system operations, procedures and protocols.

181. NRECA states it is concerned by the NOPR's efforts to establish specific one and three year time frames for resolution of various matters. It states that the Commission is authorized to comment on priorities and suggest timing, it must allow NERC to follow its ANSI-certified Reliability Standards development process.

182. NERC requests that the Commission provide a directive in the Final Rule requiring NERC to address both the Commission's concerns with the existing Reliability Standards and all comments filed in this rulemaking proceeding suggesting specific improvements to the Reliability Standards. NERC states that if the Commission acts on the views expressed on a specific Reliability Standard by an individual commenter in this rulemaking, it may encourage others to avoid participating in the NERC process and instead wait until a proposed new or modified Reliability Standard reaches the Commission approval stage to express their views on the standards. NERC states that no commenter should be entitled to have its comments on a specific Reliability Standard resolved by the Commission in this rulemaking proceeding.

183. NERC maintains that referring all comments to the NERC Reliability Standards development process for resolution is consistent with NERC's obligation to facilitate an open stakeholder process for the development of Reliability Standards. NERC asserts that it gives fair consideration to all comments and objections on a proposed new or revised Reliability Standard and such comments are either resolved to the satisfaction of the commenter, or reasons are stated as to why the commenter's recommendation should not be adopted.

b. Commission Determination

184. The Commission affirms the four possible courses of action that it will take with regard to each proposed Reliability Standard: (1) Approve; (2) approve as mandatory and enforceable; and direct modification pursuant to section 215(d)(5); (3) request additional information; or (4) remand. Each course of action is justified and has a sound basis in the statute. Xcel questions the

legality of the second option above, which it incorrectly equates to “conditional acceptance.” Rather, as explained in the NOPR,

the Commission is taking two independent actions, both authorized by the statute. First, we are exercising our authority, contained in section 215(d)(2) of the FPA, to approve a proposed Reliability Standard. Second, we are directing the ERO to submit a modification of the Reliability Standard to address specific issues or concerns identified by the Commission, pursuant to section 215(d)(5) of the FPA.

Accordingly, we reject Xcel's contention and adopt the NOPR proposal on this matter.

See

NOPR at P 79-80.

16 U.S.C. 824o(d)(5) ( “[t]he Commission * * * may order the Electric Reliability Organization to submit to the Commission a proposed Reliability Standard or modification to a Reliability Standard that addresses a specific matter if the Commission considers such a new or modified Reliability Standard appropriate to carry out this section.”).

185. With regard to the many commenters that raise concerns about the prescriptive nature of the Commission's proposed modifications, the Commission agrees that a direction for modification should not be so overly prescriptive as to preclude the consideration of viable alternatives in the ERO's Reliability Standards development process. However, in identifying a specific matter to be addressed in a modification to a Reliability Standard, it is important that the Commission provide sufficient guidance so that the ERO has an understanding of the Commission's concerns and an appropriate, but not necessarily exclusive, outcome to address those concerns. Without such direction and guidance, a Commission proposal to modify a Reliability Standard might be so vague that the ERO would not know how to adequately respond.

186. Thus, in some instances, while we provide specific details regarding the Commission's expectations, we intend by doing so to provide useful guidance to assist in the Reliability Standards development process, not to impede it.

We find that this is consistent with statutory language that authorizes the Commission to order the ERO to submit a modification “that addresses a specific matter” if the Commission considers it appropriate to carry out section 215 of the FPA.

In the Final Rule, we have considered commenters' concerns and, where a directive for modification appears to be determinative of the outcome, the Commission provides flexibility by directing the ERO to address the underlying issue through the Reliability Standards development process without mandating a specific change to the Reliability Standard. Further, the Commission clarifies that, where the Final Rule identifies a concern and offers a specific approach to address the concern, we will consider an equivalent alternative approach provided that the ERO demonstrates that the alternative will address the Commission's underlying concern or goal as efficiently and effectively as the Commission's proposal.

Moreover, in the NOPR, the Commission first discussed in detail its substantive concerns regarding a particular proposed Reliability Standard and, to provide greater clarity regarding the Commission proposal, then summarized the proposed findings and modifications. It appears that such summaries of broader and fuller discussions led to misunderstandings of the NOPR proposals.

16 U.S.C. 824o(d)(5).

187. Consistent with section 215 of the FPA and our regulations, any modification to a Reliability Standard, including a modification that addresses a Commission directive, must be developed and fully vetted through NERC's Reliability Standard development process. The Commission's directives are not intended to usurp or supplant the Reliability Standard development procedure. Further, this allows the ERO to take into consideration the international nature of Reliability Standards and incorporate any modifications requested by our counterparts in Canada and Mexico. Until the Commission approves NERC's proposed modification to a Reliability Standard, the preexisting Reliability Standard will remain in effect.

188. We agree with NERC's suggestion that the Commission should direct NERC to address NOPR comments suggesting specific new improvements to the Reliability Standards, and we do so here. We believe that this approach will allow for a full vetting of new suggestions raised by commenters for the first time in the comments on the NOPR and will encourage interested entities to participate in the ERO Reliability Standards developmen

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.